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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 Brewer 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 are still benefits and risks for everyone involved. As a property owner, you must know as much as you can about rent-to-own agreements before you offer them 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. With this arrangement, the tenant builds equity in the property each time they make a rental payment, which could help them secure better financing terms once the time comes to qualify for a mortgage. Most rent-to-own agreements also do not require the tenant to buy the home, so they are free to walk away from the deal at any time without fear of a negative impact on 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. In addition, you will also be receiving regular rental income, often at a higher rate than what your property would normally bring. Regardless of your tenant’s final decision, most agreements let the property owner keep the option fee and the rental payments.

Risks for Tenants

Under a rent-to-own agreement, tenants also face some risks. Since the monthly payment under a rent-to-own option is usually higher than the average rent, your tenant could have some cash trouble down the road. All payments made, plus the option fee, are forfeited in case the tenant walks away from the deal. The tenant also bears all the cost of maintenance and repair on the property, which is an advantage for property owners but can add to the tenant’s financial burden.

Risks for Property Owners

There are a few ways that a rent-to-own agreement can hold risks for property owners, as well. You may have to wait years to receive the full price for the property, unlike in a conventional sale. 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. 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. 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 Acadia. Our Brewer property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 207-561-7482 or contact us online to learn more!

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