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Should You Offer Rent-to-Own Options?

Model Houses Next to Stacks of CoinsA creative way to invest in Fishers rental real estate is to include a rent-to-own option in leases you offer to tenants. Rent-to-own agreements, also called lease options, are sometimes provided to help tenants purchase a home they might not otherwise qualify for. It is also one way for a property owner to sell off property without listing it with a real estate agent.

In some ways, giving your tenants the option to rent to own your rental property seems like a good deal for both sides. However, there will always be benefits and risks for everyone involved. For this reason, it is critical that you learn everything you can about rent-to-own agreements before offering one to your tenants.

Benefits for Tenants

The most obvious benefit of a rent-to-own agreement is that the tenant is able to apply their rental payments toward purchasing the home. This means that the tenant is building equity in the property each time they make a rental payment. This may help them in securing better financing terms once the time comes to qualify for a mortgage. Most rent-to-own agreements also do not require the tenant to buy the home, so they are free to walk away from the deal at any time without fear of a negative impact on their credit.

Benefits for Property Owners

Offering a rent-to-own option can also hold many benefits for property owners. If you have tried selling your property through more conventional means but haven’t had much success, this could be a good alternative. Many rent-to-own arrangements require the tenant to pay a large amount as a down payment to begin the option period. This means you will have a lump sum of cash at your disposal. You will also continue to receive regular rental income, which is usually at a higher rate than what your property normally brings. Regardless of what your tenant decides, most agreements stipulate that the property owner gets to keep the option fee and the rental payments.

Risks for Tenants

Under a rent-to-own agreement, tenants also face some risks. The monthly payments under a rent-to-own option are usually higher than the average rent, which means a tenant may be strapped for cash down the road. All the payments, including the option fee, are forfeited if the tenant decides to walk away from the deal. The cost of maintenance and repair on the property also falls on the tenant. This may be good for property owners but could add to the tenant’s financial burden.

Risks for Property Owners

There are a few ways that a rent-to-own agreement can hold risks for property owners, as well. Compared to a conventional sale, you will have to wait for many years to receive the full price for the property. If you need the money before that, you can’t demand it. That can severely hamper your ability to invest in future properties or fund a retirement account.

Another possible risk arises if your tenant cannot secure financing at the end of the option period, even with the rent-to-own agreement. You could end up facing some difficult decisions regarding your property and the tenants occupying it.

Finally, suppose the market drops during the option period. Your tenant might change their mind about buying it for the price you have agreed upon, leaving you with a devalued property. Depending on how much the market drops, the option fee may not compensate for the lower price your property is likely to bring.

Clearly, offering your tenants a rent-to-own option is a big decision that needs careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Indianapolis Metro. Our Fishers property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 317-484-8444 or contact us online to learn more!

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