Why Rent to Own Makes Sense For Newbie Investors
Rent to Own is great for newbie investors. Here are the reasons why:
1. With rent to own, you can buy a property at closer to market value and still make money. The problem in a hot market is that getting good deals is harder and harder (and specially hard if you're a newbie). With rent to own, you can sell the property at a 10-15% premium vs. market value (since you're selling it in 12-36 months), you don't pay any closing cost (when you sell), there's no dickering on the price (this could save you 3-5%) and you don't pay any realtor commissions as well. Below is a comparison of doing a fix-n-flip vs. rent to own and how much you can make on a $200,000 house that you buy-and-rehab for $150,000:
2. With rent to own, you pay less in income taxes as a percentage of your profit since you're paying long term capital gains vs. ordinary income taxes with a fix-n-flip.
3. With rent to own, you can get passive income while you wait for your tenant/buyer to cash you out. Upfront, you get a $10,000 non refundable option consideration as well. This is great for a newbie investor to build a cash reserve pretty quickly (you can't do that with rentals).
4. Since you're getting a big chunk of cash upfront, you tend to get better quality tenants (they have more skin in the game and therefore more to lose). You still need to SCREEN your tenant/buyers in the same way you screen a regular tenant. Below are the tenant screening that we use:
- check credit; credit has to be at least 600 specially if you want the tenant/buyer to cash you out in 12 months; also there should be no 90-day lates in the past 12 months
- check criminal history: no felony in past 5 years; tenant can't be a registered sex offender
- check income/ verify employment; salary has to be 3 times the rent
- check civil cases: no evictions in the past 5 years; no BIG civil suits judgments
If you're a newbie, you can't afford to get a bad tenant. With rent to own, you decrease the probability of getting a bad tenant even further because you're looking for a tenant with $10K down or more upfront.
5. With rent to own, the tenant/buyer is responsible for maintenance and repairs not the landlord. So, with rent to own, you tend to get truly passive rental income even without a property manager. If you're a newbie, you probably don't know how much repairs cost or you don't have good contractors or a good and low cost handyman to take care of the repairs for you.
6. With our rent to own, we get an average of $10,000 upfront plus the first month's rent. With a rental, you get the first month's rent and the security deposit (which is usually, the first month's rent). So if you have to evict a tenant, you will be in negative cashflow territory (i.e. all your rental profit is gone) but with rent to own, you have enough reserves to draw upon(because of the $10K upfront) and you will still make money.
However, you have to do rent to own in the right way. My next post will talk more about this.
What about you BP Nation? Anyone out there who did rent to own? What's your experience with it?