Win-win sounds so cliché these days, but in my mind there is no better way to describe rent to own. The simple truth is that when properly designed and executed, rent to own programs present a winning scenario for both the tenant-buyer and the investor. Of course, rent to own won’t work as an ideal solution in every situation, but with the right tenant-buyer everyone wins.
3 Situations Where Rent to Own Can Help
There are 3 common situations where rent to own is often a great solution:
- Down payment – Often times tenant-buyers have a solid income but can’t qualify for traditional financing because they don’t have the down payment required.
- Credit – Tenant-buyers may also have trouble getting traditional financing because they have not yet established credit or have done something to damage their credit.
- Income – Another common obstacle to obtaining financing is income concerns. The bank does not look at self-employment or commissioned income the same way they look at salaried income.
There are more circumstances which may create an opportunity for a win-win rent to own deal, but these are 3 of the most common.
How Rent to Own Offers a Solution
In each of the 3 cases above, rent to own offers an excellent solution. If tenant-buyers lack the down payment they need, the program is setup to ensure their initial down payment plus monthly rent credits will add up to the down payment they’ll need at the end of their rent to own term. In the case of credit problems or income concerns, the rent to own term gives the tenant-buyer the time they need to establish or repair their credit, or the time they need to show a steady track record of income. In each case, a fairly designed rent to own program will put the tenant-buyer in a strong position to qualify for financing by the end of their rent to own term.
How the Investor Wins
There are numerous benefits for the investor in a rent to own transaction. First, the investor receives some sort of deposit from the tenant-buyer which reduces their risk and the out-of-pocket capital required to close the deal. Second, the tenant-buyer makes higher monthly payments since there is an option credit portion, but during the term leading up to the eventual purchase this creates stronger cash flow for the investor. Third, compared a regular rental property, the investor has less to worry about because the tenant-buyer is responsible for repairs and maintenance and will treat the home as their own since they have provided a deposit and their objective is for them to buy the home at the end of the program. These 3 benefits combine to create a more passive investment option with strong returns and a pre-determined exit strategy.
With tangible benefits to both the tenant-buyer and investor it is plain to see how rent to own can be a win-win strategy for everyone involved. From experience I can tell you, it is still possible to make returns of 30%+ per year while truly helping your tenant-buyer and keeping their best interests at heart. To me, that is a smart and rewarding way to create cash flow today and long-term wealth for tomorrow.
Photo: Gamma Man
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Article Author: Andrew C. MacDonaldAndrew has written 26 articles for us.
Visit Andrew's Website: http://www.andrewcmacdonald.com
Andrew is a Canadian real estate investor and analyst who works with Joint Venture partners to create long-term wealth. With a focus on buying and holding positive cash flow properties in Canada's Technology Triangle, Andrew makes the benefits of real estate investment available to those who lack the time or expertise to buy and manage property themselves.
Joshua Dorkin
{ 13 comments… read them below or add one }
I think that renting to own is a great option as well; less risk for both parties in this unstable economy.
Lily, the risk to the investor is greatly reduced, but for the tenant-buyer they must be sure they can stick to the program otherwise their risk is increased since they put up a down payment.
I think that renting to own is a great option as well; less risk for both parties in this unstable economy.
Rent to own is a better option especially if you don’t have that much money on hand. On the owner side, it is advantageous because tenants have a sense of ownership so the property will be taken care of.
Cynthia, This is the beauty of rent to own. The type of people you have living in your asset changes dramatically. There is a big difference in attitude between tenant and tenant-buyer and it will show in how they treat you and your property.
Rent to own makes total sense. Therefore most people won’t like it!
Jill, isn’t this often the case? It makes so much sense, it must be too good to be true.
Right now, real estate properties relatively have lower price. So those who are renting to own might just buy a house.
Amanda, the tenant-buyers can still take advantage of the low housing prices but rent to own is a good option when they cannot qualify for traditional bank financing. If they are declined because they lack down payment, have bruised credit, or can’t prove income then they might need another option like rent to own to get in on the low home prices we see today.
Renting to own is essentially buying anyway. Which is why I wonder why this is not being employed by more investors. Probably because most of them are thinking of making a quick buck.
Hi Jason, I think you’re right. This isn’t a way to make a quick buck, but it is a good sustainable strategy that reduces your risk when compared with the traditional buy-and-hold rental property investment. You won’t double your money in 6 months here, but you probably will within 3-4 years.
Can you give me a bit of advice? Where can I find a solid “Rent To Own” contract? What type of insurance does the true home owner have to carry on a rent to own contract or does this vary by state? Generally speaking is the investor the one that creates the terms for a rent to own contract?
Hi Nicole,
I split my rent to own agreements into 2 pieces:
1) The Occupancy Agreement
2) The Option Agreement
The rules in your province or state will dictate what constitutes a “solid” agreement in your area so you will be better off to get an agreement from a local RTO investor.
As for insurance, the true homeowner will always be required to have property insurance on the home itself as a condition to obtain mortgage financing. I also make it a requirement for tenant-buyers to obtain a tenant’s insurance policy to cover their own belongings and provide themselves some form of liability coverage (this was recently made legal in my province so check whether it is possible where you invest).
Finally, I would say the investor is generally the one that creates the terms for a Rent to Own contract. Typically he who has the gold makes the rules and in this case, the tenant-buyer will jump through hoops for you while you jump through hoops to get the mortgage from the bank for the duration of the RTO term.
Hope that helps and good luck!
Cheers,
Andrew
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