What You Should Know About Rent-to-Own Agreements
Consumers today often hear from older generations that renting is a waste of money and that they should be putting a down payment on a property instead. The rationale is that the rental proceeds are going into the pockets of investors. On the other hand, by putting a down payment then the monthly mortgage payments are helping to build their personal assets. If we look at this from an investor’s perspective, it presents a unique opportunity that can fill this gap. This comes in the form of rent-to-own agreements.
What are rent-to-own agreements and how do they work?
Are you wondering what these rent-to-own real estate agreements entail? In all honesty, they are exactly what they sound like. Generally, you will invest in some sort of rental property, like a single family home, townhouse or condo. In the scenario of a typical rental property, you would have to cycle through tenants from whom you collect monthly rental proceeds and would own the property indefinitely. However, in these new types of agreements the difference is that the tenant makes payments towards the principal of the property. In some cases, a portion of their monthly rental payments are credited each month towards eventually buying the property from you should they decide to do so. Initially, you will have agreed upon a certain timeline and payment amount. Eventually, once the requirements are satisfied, you will hand the keys over to the new property owner and continue on to your next investment.
Why are rent-to-own deals attractive?
Generally, investors are interested in these types of real estate deals to add a consistent cash flow to their investment portfolio – specifically in the form of rental income. So you might ask, why not just rent the property out like a typical rental property? Well, essentially you are except that you have the end goal of selling the property. However, there are some benefits to these types of deals, as well as situations when they may be appropriate.
First of all, you will benefit from a sense of stability since your tenant will typically be in it for the long run. After all, their money is basically going towards a down payment on the property. In case they do decide to leave, you as the landlord get to keep all of the monthly rental proceeds.
Second, the sum of the rental income won’t just cover the existing mortgage but will likely exceed it. And of course, this additional margin belongs to the landlord.
Another scenario could occur in a market that presents a challenge for homeowners trying to sell their properties. If you are wanting to sell the property, then a rent-to-own could be seen by a first-time homebuyer as a great opportunity. Of course, there are other potentially more lucrative investment choices, but in certain scenarios rent-to-own agreements are a great way to go.
Challenges of rent-to-own agreements.
Like all investment opportunities, rent-to-own deals come with their own set of challenges.
Pricing the value of the deal appropriately. Given the complex nature of these deals, precision is required. In an upward market, you’ll want to be sure that you don’t underprice your property and end up missing out on potential profits in the future. On the other hand, you will also want to avoid overpricing it in a down market as it could deter potential tenants, or even have your current tenant walk away from the deal.
Tenant walks away from the deal. It’s happened before and just because someone is putting money into your property, you should never discount the potential of them walking away. Of course you still make money in these cases as the tenant will be leaving all the rent proceeds behind. However, it requires that you start from square one in terms of finding a new tenant interested in a similar agreement.
Rent-to-own deals present unique opportunities and challenges for both consumers and investors. Today's market is filled with many opportunities for the savvy investor. Our Rich Dad Education trainers will introduce you to proven strategies that can help you launch your career as a successful real estate investor and develop a "Rich Dad Mindset."
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