Real estate investors know how to make use of any opportunity that knocks on their door. The real estate investment world has evolved from being dominated by the rich to a world where anyone from any kind of background can become a real estate investor. If you are thinking of venturing into real estate but not positive that you can complete the purchase of a property soon enough, the real estate investment world has found a solution for you! For most beginner real estate investors, finding an opportunity to invest in real estate while having the option to seal the deal in a few years may sound like a dream. Rent to own homes are the solution for you and the first step you can take in buying an investment property.
What are rent to own homes?
Rent to own homes are also known as lease-to-own properties. The concept can be defined as having an option to purchase a property that you’re leasing within a certain amount of time. Usually stated in a lease-to-own agreement, the tenant can practice the option to purchase the property for a predetermined price.
What to expect when opting for rent to own homes
As for any real estate investing strategy, there are a few incentives and drawbacks to this kind of strategy:
Advantages of rent to own homes
- Handling the property as your own
One of the best advantages of rent to own homes is having control over the investment property itself. You can assess the property’s needs and improvements needed prior to owning the property legally, which is an option many property buyers only wish to have.
- Home equity
The tenant’s rent payments will go towards equity in the property which is the best method for real estate investing for beginners anyone could ask for. Building equity usually happens through a portion of the rent payments, typically $300-$400 a month.
Related: What Is Equity in Real Estate?
- The owner, aka the landlord, covers the taxes
The landlord will pay the property taxes until you practice the option to buy, meaning that you won’t have to worry about taxes or any costs of the property until you buy the property.
- The deposit is deducted from the total price of the property.
The option deposit that the tenant pays in order to have the rent to own option is deductible from the total price of the property.
Disadvantages of rent to own homes
- Higher rents
This is a pretty obvious disadvantage of rent to own homes as the rent tends to be of a certain percentage higher than regular rent. However, rental property financing can be a lot harder when compared with rent to own homes.
- Maintenance costs
This term may vary from an investment property to another depending on your lease-to-own agreement. Many real estate investors delegate the maintenance and upkeep responsibilities to the tenant as he/she will soon legally own the property.
- Higher property price
If you’ve looked into financing investment properties, then you must know the complications and cost of it all. Real estate investors choose to list their properties as rent to own homes in order to cut straight to the point and raise the price of the property. This is a double-edged sword as you are paying a higher price for an easier financing option.
- Nonrefundable down payment
With rent to own homes, the seller takes an option fee which counts as a down payment on the property if the tenant chooses to practice the option to buy. On the other hand, this down payment is nonrefundable if you don’t choose to purchase the property before the option agreement expires. Additionally, if you decide to renew the lease you will be expected to come up with another down payment for the option to buy.
- Delayed payments are not accepted
If you don’t pay the rent on time, you might lose the right to buy the investment property. As a buyer, you must understand the consequences of late payments as it can affect the price of the property if the agreement states that the payment for the late month does not count.
Buying real estate investments as rent to own homes requires attention to detail and knowledge in both the real estate industry and the landlord-tenant law. This is reflected upon rent to own homes as they are invigorated by a healthy mix of renting a property and purchasing one.
Few tips for rent to own homes as investment properties
Beware of scams
Many property buyers have fallen for scams in rent to own homes. Make sure to research the company or owner you’re buying from. If it’s a company, don’t shy away from asking for references and owners of investment properties they sold.
Conducting research is a no-brainer! If you’re going to put your hard-earned cash into anything, you must know all aspects of your purchase before moving forward. Consider using Mashvisor’s investment property calculator to get the right idea about your investment property and get to know all the metrics that can determine if your investment in the property is a hit or a miss, such as the return on investment.
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Have a plan
Having a plan is a must to complete the purchase of the rental property. You are more likely to achieve any goal if you set minor objectives that lead you to it. If you have an issue with your credit or couldn’t secure a lender to lend you cash to make the purchase, consider taking proper steps to ensure that you can take such a step in the future.
Buying rent to own homes may not be the ideal solution for all real estate investors. However, for those who could not secure a mortgage and wish to start small without having to dig through rental properties financing, it can be quite lucrative. Sellers may go for rent to own homes when they list their properties, usually to increase their rental income. On the other hand, looking at these investment properties from the buyer’s side, they can be low risk investments in most cases. If you have any more insights about rent to own homes, please share them with us in the comments section.