Investor Series – Renting or leasing out a property to own
August 15, 2022
This is one of many articles we will be writing regarding investing in Real Estate. Today we’ll be looking at leasing or renting to own. How it works and the pros and cons.
Renting out a home is a good way to get cash flow from a property. What happens when you want to sell that property but it’s a very soft market? Perhaps you want a bigger return than you can get from a straight sale? Renting out a property to own might be a good solution!
Renting a home to own involves a few steps and decisions. First, you have to determine fair rental value for the home. A popular way is simply to look in the area at what similar size and condition homes rent for. Once you have this value, you need to decide how you’d like to structure the purchase. Let’s look at some different examples.
One way to structure a purchase would be to have the tenant buyer place a down payment at lease signing. This money would be held in escrow and once they complete the terms of the lease and execute their option to purchase, that down payment would be applied to the purchase. If they were to forgo executing their purchase option the seller/landlord would keep all or a portion of the down payment.
Since most buyer/tenants don’t have a lot of money at lease signing, another popular way to do a rent to own would be to simply apply a portion of the rent towards the purchase. This portion would be credited to the tenant/buyer upon a successful completion of a purchase. Otherwise, the seller/landlord would keep the extra rent.
The actual purchase price is usually determined at the time of lease signing. This usually benefits the tenant buyer since they know what the price will be getting and they lock it in well in advance of a purchase. If the market were to go up they benefit getting a cheaper home. If the market were to go down, they can simply walk away from the investment.
The landlord seller benefits from this arrangement by getting monthly rental payments on top of the purchase price. In a soft market it can also motivate a tenant buyer to complete a sale since they have some money invested in the transaction. A landlord seller can also avoid a lot of the hassles that come with trying to sell a property post-tenant such as resetting/rehabbing the home, commissions and marketing fees, showings and other fees and hassles.
