Call it rent to own, lease to own, lease options, or whatever you like. The strategy has been gaining popularity thanks to the numerous benefits of rent to own for each party in the transaction. There are two fundamental approaches to putting these deals together; the tenant first approach or the property first approach. There are many investors using each strategy and each has its own advantages and disadvantages.
Tenant First Rent to Own
As implied by the name, the first step in the tenant first strategy is to find a qualified tenant-buyer who is going to rent to own a property and intends to buy it out at the end of the lease term. This is easier said than done, and it generally takes a lot of filtering to find qualified applicants with realistic expectations.
Once a suitable tenant-buyer has been located the investor helps them find a property that meets their criteria and pre-established budget.
When the investor has both a tenant-buyer and the right property, they can either close themselves or bring in another investor as a money partner to fund the deal.
Property First Rent to Own
Again as the name implies, property first rent to own means you start out with a property and then find a tenant-buyer. You may opt to use this method if you already have a single family rental and are considering rent to own, if you get great deals on properties through Quickturn style real estate, or if you just have a single family home with good curb appeal that you think would work well as a rent to own.
With this strategy, the specific property is marketed as rent to own and the owner will usually do showings, take applications, and filter prospects similar to the usual rental process. Even with an attractive property, sifting through a large number of applicants is usually required to find the right tenant-buyer for the property. The nice part here is that the property is usually available and your tenant-buyers can get into their new home right away.
Pros and Cons
I tend to prefer the tenant first strategy, but each investor has their own opinion and there is no right or wrong way to do it. Some of the things I like about tenant first rent to own are:
- Filter tenants first to avoid working with tire kickers
- Tenants select their own home to suit their needs
- Can have tenants take on more upfront expenses (eg. property inspection)
- No vacancy since tenants take occupancy when you close
On the other side of the fence, property first has a few benefits of its own:
- Purchase below market value
- Buy in locations you like best
- Tenants can move in immediately
If you have a large list of tenant-buyers in a specific area, property first can work well. The main risk I see is having the property sitting vacant waiting for the right tenant-buyer to like that specific property.
As a conservative risk adverse kind of guy, the certainty of the tenant first strategy clicks for me.
What is Your RTO Strategy of Choice?
I’d love to hear more on which rent to own strategy readers prefer. Do you like tenant first or property first, and why?
Photo: House of Joy Photos