Rent to own homes is a real estate strategy that is used by buyers/tenants in order to own properties that they can’t afford or can’t obtain finances for, resulting in advantages for both the buyer and the seller of the income property.
So, what is a rent to own homes strategy? Where can you find them? And what are the major advantages and disadvantages related to them for both the buyer and the seller of the real estate property?
Note: This article was based on an article written by Rentown.net on the same topic. The original article can be found here.
Let’s dive deep into it.
What Are Rent to Own Homes?
Rent to own homes is a strategy used in real estate in which a homeowner/landlord rents out his/her income property to a prospective buyer/tenant with a special conditioned lease that allows the buyer/tenant to own the house he/she is renting after a set period of time has passed.
In simpler terms, a rent to own homes strategy allows a homeowner/landlord to keep renting out his/her income property while also ensuring that the rental property will be sold to the tenant/buyer after the duration of the lease has ended.
While there is more to the strategy than simply that, the rent to own homes strategy has been gaining an increasing amount of popularity in the recent years for a number of different reasons.
Related: The Pros and Cons of the Rent to Own Homes Investment Strategy
Where Can I Find Rent to Own Homes?
If you’re looking to find rent to own homes anywhere in the US, head over to Rentown.net – a website dedicated to this strategy and everything related to it.
Why Are Rent to Own Homes Gaining Popularity?
First, the strategy is gaining popularity due to mortgage loans becoming increasingly harder to obtain from banks and lenders after the financial crisis. This led to a larger number of potential buyers finding it more challenging to achieve a high enough credit score in order to apply for a mortgage loan.
This is an issue that can be solved through a rent to own strategy, as the prospective buyer can become a tenant and pay rent for the income property that he/she intends to own in a few years, while also paying towards the ownership of the income property without the need to have a saved up down payment on the property or having to obtain a mortgage loan to straightforward purchase it.
Second, the interest rates on mortgage loans have also been increasing to harsher levels, which makes the option of financing the purchase of a real estate property through a mortgage loan a less viable strategy, which also leads people to rely on rent to own homes if they want to become homeowners.
Related: Is Being a Landlord the Right Choice for You?
How to Start a Rent to Own Agreement?
Finding the Right Property
The first step to any real estate deal or transaction is always finding the right investment property to invest in or to consider purchasing.
This step follows the same guidelines as in any other strategy in real estate, but it will also be more specific to the types of real estate properties that can be purchased through a rent to own agreement.
If you’re looking for rent to own homes, it is crucial that you get acquainted with the owner of the property before moving forward with an offer. This is because a rent to own homes strategy involves homes that are for sale by owner, meaning that the conditions of the agreement will rely heavily on the individual owner of the property and his/her preferences.
These preferences might not always meet your expectations or be satisfactory to you. That is why it is always best to know the homeowner/landlord, ask about his/her, and know as much as you can about him/her and about the real estate property that you’re going to invest in.
Negotiating the Deal
When negotiation deals for rent to own homes, there are a number of aspects that any prospective buyer or real estate investor needs to take into consideration.
As a starter, any person who’s negotiating a real estate deal of any sort, and a rent to own homes agreement in particular, needs to protect him/herself against any scams or unexpected complications that might arise during the deal that might compromise your interests.
This is why it is considered critical that you first check the current owner’s background. This can be done by contacting the county organization in the property’s area. Records of the property will generally be available to the public, and they will show the real estate property’s past deals history, construction information, property tax information, date of construction, and any additions to the property or the property’s appraised value.
Additionally, these are the key aspects that you should take into consideration while negotiating the deal:
- Purchase Price: Make sure that the price that you agree upon in the agreement is fixed, and avoid any agreements where the price tag is empty or will be agreed upon in the future.
- Standard Rent: The agreement should include both the amount of rent that you will be paying and the portion of that rent that will be going towards rent credit/property’s purchase price.
- Closing Time: The closing time of the income property’s purchase should be determined in the agreement. Make sure that the owner understands that the timeframe you’re giving him/her will ensure that you will be buying the rental property eventually and that you are serious about it.
- Maintenance: This can be different from one agreement to another. But a rent to own homes agreement should generally include conditions related to the maintenance of the property and the person responsible for covering its costs.
- Option Fee: The option fee is the fee that you as the prospective buyer or tenant will have to pay for the option of purchasing the rental property at the end of the lease duration.
- Rent Premium: This section should include the amount of extra cash that the tenant/buyer of the rental property has to pay on top of the normal rent. This money is stored in an escrow account, and if the lease is broken or the tenant changes his/her mind about buying the rental property, the owner of the property gets to keep the entire amount.
After setting the terms of the lease and agreeing on them, your next step is to actually lease the rental property.
Leasing the income property includes paying the option fee. This fee is not optional and should be paid from the beginning of the contract. This fee will give the tenant/buyer the option to purchase the property by the end of the lease duration.
So, now that you know how the process goes for buying rent to own homes, it is time to go through the different advantages and disadvantages that come with using such a strategy for both the seller/landlord and the buyer/tenant.
Related: Becoming a Landlord: 5 Guidelines to Being Fair to Tenants
Rent to Own Homes: Seller/Landlord’s Perspective
From the perspective of a seller or a landlord, the rent to own homes strategy can be very beneficial for a number of reasons. But this strategy might also have certain disadvantages to it as well.
Generally speaking, the rent to own homes strategy, when made available by a homeowner, is considered more beneficial to the seller due to his/her control over the conditions of the rent to own agreement. Basically, rent to own homes agreements are generally conditioned by the seller and not the buyer, as the buyer is typically considered the one at a disadvantage, which leads him/her to rely on this strategy in order to finally purchase or own the income property.
But what are the advantages and disadvantages related to the seller of the income property in this case?
One of the main advantages that a homeowner or a landlord gets for selling his/her property through a rent to own homes strategy is the higher profit that he/she can make through this strategy.
- Higher Sale Price
Due to the nature of the situation that leads tenants to resort to rent to own homes, the seller may be more inclined to demand a higher sale price on the property, and the tenants will have to pay a premium on the rental property due to the financing terms that are determined by any rent to own agreement.
- Higher Cash Flow
Rent to own homes usually generate a higher cash flow than normal rental properties. This might be the biggest advantage of the rent to own homes strategy, as the landlord will be generating a higher cash flow due to the tenant paying his/her rent in addition to the rent premium, resulting in a higher amount of cash generated on a monthly basis.
- Higher Rent
In addition to generating a cash flow naturally through a rent to own homes strategy, a landlord can also demand a higher rent on the rental property in exchange for the higher flexibility provided with regards to the financing terms.
- Lower Risk
From the landlord/seller’s perspective, a rent to own homes strategy is relatively risk-free. This is because the strategy dictates that if the tenant/prospective buyer changes his/her mind about purchasing the rental property or is unable to finance the purchase, any cash that was paid towards the ownership of the property, such as the rent premium and the option fee, will not be refundable, and the owner gets to keep it as a profit.
- No Need for an Agent
Lastly, a landlord/seller of a rent to own homes income property will often not need a real estate agent to help him/her close the deal. Although a real estate agent might be useful for negotiating the terms of the deal and drafting an effective lease agreement, it is very possible for the homeowner to obtain a template for the agreement from different sources and negotiate the deal on his/her own, saving him/herself the extra costs of hiring a real estate agent.
Related: Becoming a Landlord: The Best and The Worst
Generally speaking, there aren’t many disadvantages that come with a rent to own agreement for the seller/landlord.
However, although the rent to own homes strategy has been gaining popularity in recent years, it is normally more challenging to find prospective tenants/buyers who are willing to rely on this strategy, and the homeowner might struggle to find a good deal to occupy his/her income property and eventually purchase it.
Rent to Own Homes: Buyer/Tenant’s Perspective
When it comes to the perspective of the buyer/tenant of rent to own homes, the advantages and disadvantages are more clear and are easier to identify than with the landlord/seller.
This is because the advantages of a rent to own homes strategy for the buyer/tenant are more conditional and mostly arise due to certain financing difficulties related to obtaining a mortgage loan and/or achieving an acceptable credit score as mentioned earlier in the article.
So, what are the advantages and disadvantages that a buyer / tenant gets from using a rent to own homes strategy?
In most cases, the advantages of using this strategy far outweigh the disadvantages, especially considering the financial situation of most buyers who rely on this strategy.
With the main advantage being easier and more manageable financing terms for the purchase of the rental property, here are the biggest advantages that the buyer gets from relying on this strategy in more detail:
- Equity Growth
Whereas the landlord/seller of the rental property gains advantages from the higher rents that the tenant has to pay towards the ownership of the property, the tenant will gain the advantage due to the fact that the rent he/she is paying does not only allow him/her to reside in the rental property, but will also contribute towards finally purchasing the rental property and owning it.
Basically, the tenant will grow his/her equity through paying the rent because part of that rent is actually being invested in the future purchase.
- Minimum Expenses
One of the biggest advantages that the prospective buyer gets is the ability to purchase an income property without having to pay a down payment, which is usually a percentage of the overall price of the property.
Additionally, since the ownership of the income property is promised to you, but the property isn’t yours yet, it is common for both the tenant and the landlord of rent to own homes to share the burden of maintenance expenses and split the costs between themselves due to the relatively shared ownership of the rental property for the duration of the lease.
- Option Deposit Is Credited
The option deposit that the buyer/tenant pays to the homeowner, which is a fixed interest on the price of the property, will be totally credited when the buyer finally purchases the property.
Depending on the homeowner/seller of the income property, there can be a great deal of flexibility in the rent to own homes agreement. Both the buyer and the seller can come to terms and agree on the most convenient terms for the interest of both.
This flexibility should be utilized by the buyer/tenant in order to make up for the credit score and to help him/her achieve a higher credit score.
- Control of the Property
Lastly, the tenant in a rent to own homes strategy will have complete control over the property as long as he/she is making rent payments. This is drastically different from a normal rental agreement, as the tenant, in this case, will consider the rental property as his/her own due to slowly working towards ownership of that property.
The biggest disadvantage for the tenants of rent to own homes is the strict commitment that they would have to make towards their purchase.
First of all, if the tenant changes his/her mind about owning the rental property or is no longer able to pay the rent and the other costs of owning it, any money that he/she has invested towards owning the property up to this point will all be transferred to the seller, and the tenant won’t be refunded.
This means that the longer the tenant stays in the rental property, the bigger the loss will be if he/she ever changes his/her mind about purchasing it.
Additionally, any rent that the tenant fails to pay for a particular month throughout the duration of the lease will heavily affect the amount of money that he/she would end up having to pay at the end of the lease in order to own the rental property.
This is because part of the rent goes towards the down payment of the property, and failure to pay that rent will reduce the amount of money paid towards the down payment for owning the rental property.
Related: Rent to Own Homes: A Win-Win Real Estate Investment Strategy
The rent to own homes strategy is a very useful strategy to consider in the world of real estate for all buyers, sellers, and real estate investors.
Despite the certain conditions that have to be met in order for this strategy to be viable and most effective, there can be several ways that you can utilize it in order to achieve the highest profits or the highest value on your real estate transaction.
Finally, in order to find the best news, guides, and tools that you can use for your rent to own homes strategy, head over to Rentown.net – a website dedicated to rent to own homes and everything related to them.
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