Some tenants may fall in love with your rental property and never want to leave—but they may also aspire to own their own homes someday. For those tenants, some property owners offer rent-to-own agreements, which can provide significant income but eventually take the property out of your inventory.
To decide whether a rent to own agreement is in your best interest as a real estate investor, consider the advantages—and the disadvantages.
A rent-to-own agreement may help your tenant to become a homeowner without having to relocate or pay a big down payment. But it can also be financially lucrative for you.
If your single-family rental tenant is interested in renting to own your rental property, you can charge a one-time, non-refundable option fee to maintain the right to purchase the house at some point. After you and the tenant have signed a rent-to-own agreement, you can require the tenant to handle all home maintenance, which can save you both time and money.
During the rental period, you can also charge higher rent, allowing a percentage of each payment to be applied toward the eventual purchase price. These extra payments are a way for the buyer to make a down payment incrementally. As the investor, you are compensated for your willingness to eventually take the property off the rental market. Later, if the tenant decides not to purchase the home, he or she forfeits all these extra funds.
If your tenant buys your rental property, you’ll lose out on future rent that could have been earned on the property. When the deal is completed, you’ll have one less property in your rental portfolio.
Rent-to-own agreements are unilateral agreements, which means the real estate investor is obligated to sell the house to the tenant if he or she exercises that option. But…the tenant is not obligated to purchase the house. While the tenant can choose whether or not to go through with the purchase, you will not have the option to sell the home to another buyer during the option period.
If you’re considering offering your tenant the option to purchase your property, make sure you develop an agreement that includes all the necessary details. Most rent-to-own agreements include both a standard lease agreement and a purchase option agreement:
Lease agreement – This is like your regular rental agreement, with terms such as the duration of the lease period, the rental amount, and the tenant and owner’s responsibilities for repair and maintenance.
Purchase agreement – This agreement offers the tenant the right to buy the property within a specific period of time for a specific amount. It requires the tenant to pay an option fee upfront or to pay rent that is higher than market value, in order to reserve that right to purchase. If a tenant doesn’t exercise his or her right to purchase during the specified time frame, he or she is not entitled to a refund of any rent or the option fee.
Consider asking a lawyer to review your contract before entering into a rent-to-own agreement with your tenant. And if you do sell a property to your tenant, you may be able to use some of the proceeds to purchase a replacement property.
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