An alternative way to invest in Poquoson rental real estate is to offer tenants a lease that comes with a rent-to-own option. Rent-to-own agreements, also called lease options, are sometimes provided to help tenants purchase a home they might not otherwise qualify for. This is one way, as well, for a property owner to sell the property without listing it with a real estate agent.
In some ways, giving your tenants the option to rent to own your rental property seems like a good deal for both sides. But, like many things, it comes with benefits and risks for everyone involved. For this reason, it is critical that you learn everything you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
A major benefit for a tenant is that a rent-to-own agreement lets them apply their rental payments toward purchasing the home. Under such arrangements, the tenant is building equity in the property each time they make a rental payment. This could help them secure better financing terms once the time comes to qualify for a mortgage. At the same time, rent-to-own agreements do not require the tenant to buy the home, leaving them free to walk away from the deal at any time without a negative impact on their credit.
Benefits for Property Owners
Offering a rent-to-own option can also hold many benefits for property owners. This is a great option if you’ve tried selling your property through more conventional means but haven’t had much success. Under many rent-to-own arrangements, the tenant is required to pay a large down payment to begin the option period. This means you will have a lump sum of cash at your disposal. You will also continue to receive regular rental income, which is usually at a higher rate than what your property normally brings. Even if your tenant decides otherwise, most agreements allow the property owner to keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants also face some risks. The monthly payments under a rent-to-own option are usually higher than the average rent, which means a tenant may be strapped for cash down the road. The payments made, including the option fee, are usually forfeited if the tenant decides to walk away from the deal. Since the tenant also bears all the cost of maintenance and repair on the property, it could add to the tenant’s financial burden, even as it is an advantage to the property owners.
Risks for Property Owners
A rent-to-own agreement can hold risks for property owners, as well. Compared to a conventional sale, you will have to wait for many years to receive the full price for the property. If you need the money before that, you can’t demand it. That can impact your ability to invest in future properties or fund a retirement account.
Another possible risk arises in the event that your tenant cannot secure financing at the end of the option period, even with the advantage of the rent-to-own agreement. In that case, you might have to face difficult decisions regarding your property and the tenants occupying it.
Finally, suppose the market drops during the option period. Should that happen, your tenant may decide not to buy it for the price you originally agreed upon, leaving you with a devalued property. Depending on how much the market drops, the option fee may not compensate for the lower price your property is likely to bring.
As you can see, the decision to offer your tenants a rent-to-own option is one that requires careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Dominion. Our Poquoson property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 757-395-4274 or contact us online to learn more!
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