One of the more productive and creative techniques to invest in Rexburg rental real estate is to offer tenants a lease that includes a rent-to-own option. Rent-to-own agreements, also called lease options, are often provided to help tenants purchase a home they might not otherwise qualify for. It is similarly a practice for the property owner to sell the property without listing it with a real estate agent.
In a lot of ways, supplying your tenants the option to rent to own your rental property appears to be an enticing deal for both sides. However, there are both benefits and risks for everyone involved. In this regard, it’s necessary to know as much as you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The most noticeable benefit for a tenant is that a rent-to-own agreement commonly allows them to apply their rental payments toward purchasing the home. Under such deals, the tenant is building equity in the property each time they make a rental payment, which may easily help them secure better financing terms as the time comes to qualify for a mortgage. However, quite a lot of rent-to-own agreements do not require the tenant to buy the home, leaving them free and safe to withdraw from the deal at any time without negatively impacting their credit.
Benefits for Property Owners
Granting a rent-to-own option can moreover hold additional benefits for property owners. This is primarily true if you’ve tried to sell your property through more conventional means without much success. Under several rent-to-own arrangements, the tenant often pays a large down payment to get started with the option period. That can put a lump sum of cash directly into your pocket. You’ll likewise continue to receive regular rental income, most often at a higher rate than what your property would usually bring. Doesn’t matter what your tenant decides, most agreements let the property owner keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants equally endure added risks. The monthly payment under a rent-to-own option is mostly higher than an average rent, which may leave a tenant strapped for cash down the road. Those payments, plus the option fee, are forfeited if plans change and the tenant decides to walk away from the deal. The tenant likewise bears all of the cost of maintenance and repair on the property, which may be great for property owners but add to the tenant’s financial burden.
Risks for Property Owners
There are particular ways that a rent-to-own agreement can hold risks for property owners, also. Unlike a conventional sale, you may wait years to receive the full price for the property. If you need the money before that, you won’t have access to it. That can seriously prevent your ability to invest in future properties or fund a retirement account.
Another potential risk ensues if or when your tenant cannot secure financing at the end of the option period, even with the added advantage of the rent-to-own agreement. If that occurs, you will face other difficult decisions regarding your property and the tenants occupying it.
One last point to consider is if ever the market drops during the option period. If such is the case, your tenant may not be able or willing to buy it for the price you originally agreed upon, leaving you stuck with a devalued property. Subject to how much the market drops, the option fee may not compensate for the lower price your property is most likely to bring.
For these reasons, ultimately choosing whether or not to offer your tenants a rent-to-own option is a big decision that demands heedful consideration. In such instances, it can be helpful to have the advice of a local market expert like Real Property Management Southeast Idaho. Our Rexburg property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 208-522-2400 or contact us online to learn more!
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