One creative way to invest in Capitol Hill rental real estate is to offer tenants a lease that includes a rent-to-own option. Rent-to-own agreements also called lease options, 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.
Giving your tenants the option to rent to own your rental property can be a good deal for both sides. However, there will always be benefits and risks for everyone involved. It is best to know as much as you can about rent-to-own agreements before you offer one to your tenants.
Benefits for Tenants
One of the obvious benefits for a tenant is that a rent-to-own agreement will allow them to apply their rental payments toward purchasing the home. This means that the tenant is building equity in the property each time they make a rental payment. This may help them in securing better financing terms once the time comes to qualify for a mortgage. At the same time, most of these rent-to-own agreements don’t require the tenant to buy the home, making it easy for them to walk away from the deal at any time without any negative impact on their credit.
Benefits for Property Owners
Offering a rent-to-own option can also hold many benefits for property owners. This is especially true for those who have been trying to sell their property through conventional means with no success. Most rent-to-own arrangements require the tenant to pay a large down payment to begin the option period. That means you receive a lump sum of cash directly into your pocket. Aside from that, you will continue to receive regular rental income, often at a higher rate than what your property would normally bring. 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. The monthly payments under a rent-to-own option are usually higher than the average rent, which means a tenant may be 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 cost of maintenance and repair on the property also falls on the tenant. This may be good for property owners but could add to the tenant’s financial burden.
Risks for Property Owners
Rent-to-own agreements can hold risks for property owners, as well. In contrast to a conventional sale, you may have to wait several years to receive the full price for the property. Should you need the money before that, you will not have access to 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. You could end up facing some difficult decisions regarding your property and the tenants occupying it.
Finally, suppose the market drops during the option period. Your tenant may not be willing or able to buy it for the original price you agreed upon, and you get stuck with a devalued property. Depending on how much the market drops, the option fee may not cover the loss the lower price your property is likely to bring.
Evidently, deciding to offer your tenants a rent-to-own option is a major decision that needs careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Washington DC. Our Capitol Hill property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 202-813-9993 or contact us online to learn more!
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