In several ways, granting your tenants the option to rent to own your rental property apparently is a great deal for both sides. But take note, there are both benefits and risks for everyone involved. In light of this, it’s significant to know as much as you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The clearest benefit for a tenant is that a rent-to-own agreement mostly allows them to apply their rental payments toward purchasing the home. Under such agreements, the tenant is building equity in the property each time they make a rental payment, which may aid them to secure better financing terms whenever the time comes to qualify for a mortgage. Simultaneously, various rent-to-own agreements do not require the tenant to buy the home, leaving them clear to get away from the deal at any time without negatively impacting their credit.
Benefits for Property Owners
Providing a rent-to-own option can similarly hold several benefits for property owners. This is particularly true if you’ve tried to sell your property through more conventional means but really haven’t had many positive results. Under most rent-to-own arrangements, the tenant oftentimes pays a large down payment to kick off the option period. That can put a lump sum of cash directly into your pocket. You’ll furthermore continue to receive regular rental income, oftentimes at a higher rate than what your property would generally bring. Regardless of what your tenant decides, many agreements let the property owner keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants additionally meet other risks. The monthly payment under a rent-to-own option is commonly 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 furthermore shoulders all of the cost of maintenance and repair on the property, which may be excellent for property owners but add to the tenant’s financial burden.
Risks for Property Owners
There are some practices that a rent-to-own agreement can hold risks for property owners, too. 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 hinder your ability to invest in future properties or fund a retirement account.
Another potential risk occurs 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 arises, you will face further difficult decisions regarding your property and the tenants occupying it.
On a final note, supposing the market drops during the option period. If so, 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. Contingent on how much the market drops, the option fee may not compensate for the lower price your property is to bring.
As shown, making a decision whether or not to offer your tenants a rent-to-own option is a major decision that entails cautious consideration. In this case, it can be helpful to have the advice of a local market expert like Real Property Management Boston. Our Milton property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 617-522-0099 or contact us online to learn more!