Investing in Rent-to-Own Housing
One of the major drawbacks of renting a home is that your monthly payments aren’t building you any equity. You’re buying a roof over your head, but it’s always going to be covered by someone else’s shingles. You’ll never benefit from a jump in property values, and you’ll have nothing to sell when it’s time to move. The only up-side is that maintenance and taxes are someone else’s headache.
Although almost everyone recognizes the benefits of home ownership, many don’t have the means or good credit to get into the real estate market. That’s where rent to own can provide a great alternative to a home loan or mortgage.
The Fundamentals of Rent to Own
With a rent to own agreement, part of the money you pay in rent will be deducted from the purchase price if you choose to buy the property in the future. Basically, you’re purchasing an option to buy the house and making monthly payments towards the cost along the way.
To begin with, it’s important to recognize that all the terms and conditions of your rent to own agreement (lease option) are negotiated by the parties. That’s why it’s so important to have an attorney draft or review the document on your behalf. It will include the amount you have to pay upfront, which is usually about 5% of the total purchase price. It will also lay out your monthly payments, the time limits on your option, and who’s responsible for things like maintenance costs.
Over time, you may decide not to purchase the property, but walking away from the deal will forfeit your deposit (option premium).
Advantages for Buyers
There are several benefits for purchasers of rent to own housing, not the least of which is knowing your landlord can’t decide to sell the home and force you to move out. Other advantages include:
- No need to come up with the full cost of the home up-front.
- The purchase price is locked in, regardless of what happens to the market.
- Determine whether this is really the home for you before you commit to purchasing.
- Build back your credit rating over time.
- Build equity by having a portion of your rent payment for the home.
Advantages for Sellers
Rent to own can also be an attractive option for owners looking to sell:
- Receive a monthly income if you’re having a hard time getting your purchase price.
- Receive a higher rental income because tenants usually pay an extra monthly premium that goes towards the cost of buying the home.
- Rent to own tenants are invested and have an interest in looking after the property.
- You may receive a higher selling price, especially if the market is soft.
- If the tenants walk away from the deal, you keep the option deposit.
A Word of Caution
Despite the many advantages of rent to own for both buyers and sellers, things can go wrong. Buyers secure an option to purchase, but if they don’t follow through, they could end up financially worse off than if they had simply rented the home. Sellers are locking into a fixed purchase price but could lose money if the market rebounds when it comes time to hand over the property. What if the landlord stops paying property taxes? What if the tenants discover a serious crack in the foundation?
Covering all your bases can be tricky, and you’ll need an attorney to make sure the rent to own agreement is comprehensive, whether you’re the seller or the buyer. Getting professional advice is the only way you can be assured of a smooth transition from tenant to owner or selling to sold.
Posted in: Real Estate