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