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Should You Offer Rent-to-Own Options?

Model Houses Next to Stacks of CoinsAn alternative way to invest in San Bruno rental real estate is to offer tenants a lease that comes with a rent-to-own option. For tenants who want to purchase a home they might not otherwise qualify for, rent-to-own agreements– also called lease options– can be a helpful alternative. As a property owner, this is also a way for you to sell a property without listing it with a real estate agent.

Giving your tenants the option to rent to own your rental property can be a good deal for both sides. But there are still some benefits and risks for everyone involved. As a property owner, you must know as much as you can about rent-to-own agreements before you offer them to your tenants.

Benefits for Tenants

The top benefit for a tenant is that a rent-to-own agreement typically 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. This could help them secure better financing terms once the time comes to qualify for a mortgage. At the same time, most of these rent-to-own agreements don’t require the tenant to buy the home, making it easy for them to walk away from the deal at any time without any negative impact on their credit.

Benefits for Property Owners

Offering a rent-to-own option can also hold many benefits for property owners. This could be a feasible alternative if you have tried selling your property through more conventional means but haven’t had much success. Most rent-to-own arrangements require the tenant to pay a large down payment to begin the option period. This means you will have a lump sum of cash at your disposal. In addition, you will also be receiving regular rental income, often at a higher rate than what your property would normally bring. Regardless of your tenant’s final decision, most agreements let the property owner 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 tend to be higher than the average rent which may leave tenants short on cash down the road. All payments made, plus the option fee, are forfeited in case the tenant walks away from the deal. Since the tenant also bears all the cost of maintenance and repair on the property, it could add to the tenant’s financial burden, even as it is an advantage to the property owners.

Risks for Property Owners

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

Another potential risk arises if or when your tenant cannot secure financing at the end of the option period despite the added advantage of 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. Should that happen, your tenant may decide not to buy it for the price you originally agreed upon, leaving you with a devalued property. Depending on how low the market drops, the option fee may not be enough to cover the losses from the lower price your property is likely to bring.

Evidently, deciding to offer your tenants a rent-to-own option is a major 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 Mid Peninsula. Our San Bruno property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 650-696-1800 or contact us online to learn more!

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