In many ways, extending to your tenants the option to rent to own your rental property appears to be an attractive deal for both sides. But as a matter of fact, there are both benefits and risks for everyone involved. As a result, it’s imperative to know as much as you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The most discernible benefit for a tenant is that a rent-to-own agreement oftentimes allows them to apply their rental payments toward purchasing the home. Under such arrangements, the tenant is building equity in the property each time they make a rental payment, which may assist them to secure better financing terms especially when the time comes to qualify for a mortgage. Then again, many rent-to-own agreements do not require the tenant to buy the home, leaving them not liable and free to break out from the deal at any time without negatively impacting their credit.
Benefits for Property Owners
Endowing a rent-to-own option can furthermore offer various benefits for property owners. This is absolutely certain if you’ve tried to sell your property through more conventional means nonetheless haven’t had a favorable outcome. Under some rent-to-own arrangements, the tenant normally pays a large down payment to commence the option period. That can put a lump sum of cash directly into your pocket. You’ll additionally continue to receive regular rental income, usually at a higher rate than what your property would generally bring. Heedless of what your tenant decides, most agreements enable the property owner to keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants similarly bear certain risks. The monthly payment under a rent-to-own option is regularly 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 additionally carries all of the cost of maintenance and repair on the property, which may be favorable for property owners but add to the tenant’s financial burden.
Risks for Property Owners
There are quite a few ways that a rent-to-own agreement can hold risks for property owners, as well. 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 surely hold up your ability to invest in future properties or fund a retirement account.
Another potential risk happens 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 develops, you will face several difficult decisions regarding your property and the tenants occupying it.
One last thing to note is once the market drops during the option period. In that event, 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. Depending on how much the market drops, the option fee may not compensate for the lower price your property is probably likely to bring.
Consequently, determining whether or not to offer your tenants a rent-to-own option is a significant decision that involves meticulous consideration. In such circumstances, it can be helpful to have the advice of a local market expert like Real Property Management Cache Valley. Our Hyrum property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 435-753-5200 or contact us online to learn more!