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Should You Offer Rent-to-Own Options?

Model Houses Next to Stacks of CoinsOffering tenants a lease that include a rent-to-own option is a creative way to invest in Summerville rental real estate. Rent-to-own agreements, also called lease options, are sometimes provided to help tenants purchase a home they might not otherwise qualify for. As a property owner, this is also a way for you to sell a property without listing it with a real estate agent.

In some ways, giving your tenants the option to rent to own your rental property seems like a good deal for both sides. However, there will always be benefits and risks for everyone involved. This is why it is important to be knowledgeable about rent-to-own agreements before offering one to your tenants.

Benefits for Tenants

A major benefit for a tenant is that a rent-to-own agreement lets them apply their rental payments toward purchasing the home. Under such arrangements, as tenants make rental payments, they also build equity in the property which may help them get better financing terms once they can qualify for a mortgage. At the same time, most rent-to-own agreements do not require that the tenant buy the home, thus they can easily walk away from the deal at any time without negatively impacting their credit.

Benefits for Property Owners

Offering a rent-to-own option can also hold many benefits for property owners. This could be a feasible alternative if you have tried selling your property through more conventional means but haven’t had much success. Many rent-to-own arrangements require the tenant to pay a large amount as a down payment to begin the option period. This means you will have a lump sum of cash at your disposal. You will also continue to receive regular rental income, which is usually at a higher rate than what your property normally brings. Regardless of what your tenant decides, most agreements stipulate that the property owner gets to keep the option fee and the rental payments.

Risks for Tenants

Under a rent-to-own agreement, tenants also face some risks. One of these is the higher-than-average rent. The monthly payments under rent-to-own options are usually higher than average, possibly leaving a tenant strapped for cash down the road. All payments made, plus the option fee, are forfeited in case the tenant walks away from the deal. The tenant also covers all costs of maintenance and repair on the property, which is an advantage for property owners but adds to the tenant’s financial burden.

Risks for Property Owners

A rent-to-own agreement can hold risks for property owners, as well. In contrast to a conventional sale, you may wait years to receive the full price for the property. You won’t have access to the money before that, even if you need it. That can severely hamper your ability to invest in future properties or fund a retirement account.

Another potential risk arises if or when your tenant cannot secure financing at the end of the option period despite the added advantage of the rent-to-own agreement. In that scenario, you may have to face some difficult decisions regarding your property and the tenants occupying it.

Finally, suppose the market drops during the option period. There is a possibility that your tenant will not be willing to buy it for the price you originally agreed upon. You will then be left with a devalued property. Depending on how much the market drops, the option fee may not compensate for the lower price your property is likely to bring.

Clearly, deciding on offering your tenants a rent-to-own option or not is a big decision requiring careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Charleston. Our Summerville property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 843-900-4061 or contact us online to learn more!

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