owner financing a rental property you own

3 Replies

Hello! Has anyone owner financed a rental property to a tenant? We have a tenant who is interested in purchasing one of our rentals & I would definitely be interested in getting this one off the books. It's not in a great neighborhood and she has paid rent on time for the past 10 months with no issues. Any blogs/books/etc where I can find some useful info on what terms to offer and how to structure this?


I have not done this but have thought about it both as an investor and as an agent when owners have asked my opinion on this.

If you own the property outright, you can do owner financing and literally be the bank. I think most deals like this are ~5 year terms with a 30 year amortization and a balloon payment at the end. That is all well and good, but if the tenant/buyer couldn't get a traditional mortgage today, will they be able to in 5 years? Also, you won't have the control of the property over those 5 years, so if you need to foreclose what will you end up with?

Many times people talk about "rent to own". That seems to often entail a down payment and some of the rent paying down the principle for a few years until the tenant can finally get a traditional loan to pay off the rest. Again, will the tenant be able to get a loan a few years down the line if they cannot do so today? If they can't will you have to repay any of the principle they paid you?  I see this as being overly complicated.

If I was going to owner finance a property to a tenant, I would probably lean towards "rent with an option to buy". In this scenario, you lease to the tenant as you normally would, but in a totally separate agreement you sell them the right (option) to buy the property at anytime within the next X number of years at a given price. For that right (option), they pay you a chunk of money.

For example, if a property is worth $100k, they might pay you $5k up front for the right to purchase it for $95k anytime in the next 5 years.

They lock in the price now and they know you cannot sell from under them while they get their finances in order to complete the sale. Its a defined time period, so if they do not complete the sale you have gained the $5k for your trouble. All the while you are renting to them like you normally would.

Rent with option to buy is the way to go. If the renter/tenant backs out, or never funds the option, it is simple to move on. Tenants may say they desire an option to buy or even a "rent to own" but frequently won;t perform on their end or want to misunderstand their rent payment is somehow a downpayment for the property or should be credited in this way. Since this is a property you would like to move off the books and she is a good tenant, pursue it. Maybe you can negotiate on a price. Maybe you add a sum to her rent and the extra sum is used to fund her downpayment when the property transfers. But if she does not follow through, you would have to refund this to her like a security deposit (depends on how nice a person you are.) However this does save you rehabbing the property in order to sell it.

Thank you for your advice!!! We don't own the property outright yet so it seems to continue renting to her and doing a separate option contract would be the way to go.  I appreciate all your input :-)