4 Differences Between a Rental and a Rent to Own Investment
The difference between an Investment of Rental properties vs an Investment of Rent To Own properties.
For a rental property, they are asking for the 1st and last month’s rent or 1st month and a security deposit.
For example: If your rent is 1,000, the person coming in to do the rental will have to give you $1000 for the first month and $1,000 for the last month. Or in other situations, they give you $1,000 for the first month and a smaller deposit for a damage deposit. Either way, you are looking for a couple of thousand dollars on a rental that is really only worth $1,000 a month.
For a Rent To Own deposit, you are looking for someone to put down almost the equivalent a deposit they would need to buy a property or a smaller portion. I always ask for a minimum of $10,000 down up to 5% of the purchase price.
If you have a property that is $300,000 then that is $15,000. There is a lot more security required when doing a Rent To Own because those people are going to be buying that property in the end.
So for rentals, you are putting down a couple of thousands. In Rent to Own you are putting down $10,000 or more. That really differentiates a Renter from a Rent to Own client. The renter is just renting and the Rent to Owner is more committed now and they have more interest in getting the property.
If you have a Rental property you are responsible for the property and the maintenance. Some of the time the tenants are not really as keen as you to keep the property in good condition. Don’t get me wrong I have good renters that have left the property in good condition because they want their deposit back.
Now, on the other hand, I have had tenants that have left the property in complete chaos and I had to hire people to come in and do a major clean up, costing me thousands of dollars sometimes.
Some of this can be offset by doing proper tenant qualifications as discussed in previous videos.
For Rent to Own what I do is make sure that the renter is responsible for all maintenance. This includes painting, minimal repairs, cleaning, repairs if the fridge breaks and so on. The things that I cover is if there is some major problem such as the roof starts leaking or the furnace blows up. If these repairs are covered by insurance, then I help out. So the other aspect of Rent To Own is that this person wants to buy this house in 3-5 years so they are very motivated to keep the property in good shape.
What happens at the end of the Rent To Own is that we do an appraisal on the property and that appraisal will reflect the condition of the property. So it is really important that the tenant maintains the quality and makes sure that the property is really kept up to date and in tip-top shape when it’s time to buy the property.
The big difference in Rents is that in Rental properties you have to follow the market rents. By market rents what I mean is that if you are renting out a 2-3 bedroom home and the neighborhood rents are $1,400 then you need to rent it out for $1.400. Because the guy next to you is renting it out for $1,400 you can’t really rent it out for $1,600. Now there are some exceptions in that statement since some of the properties might have more bathrooms or a bigger lot but in general, a 3 bedroom home with 2 baths if it’s $1,400 in the same neighborhood then you will also need to charge $1,400.
In a Rent to Own property, what you are actually charging is what the cost of the property is to maintain it (Mortgage, interest taxes, insurance) and on top of that, you are usually adding an amount that contributes to your profit or contributes to the tenants down payment.
For example, $1,400 was just covering the costs of Mortgage, Interest, Insurance, and taxes. But the tenants also need to save an amount of let’s say $400 and you need an additional profit of say $100-$200. So that rent of just $1,400 is now $2,000 and the difference of $600.00 is cash flow. So you are actually making pretty good cash flow on this deal.
Now at the back end when it’s time to buy you just deduct that cash flow from your profit that you are going to make by selling it at a higher price so all the numbers balance at the end.
So the rents are very different between a Rental and Rent to Own investment. Now in some cases, if the costs are really low you might even be coming in at market rents which is even a bigger bonus because now you are doing a Rent to Own at the same price as people are renting at. So why Rent when you can do Rent to Own. Now the big difference is that people might NOT want to do Rent to Own or they might not have that $10,000 up-front deposit.
What that means is in a Rental property you are usually holding that property for more than 3 years. You are usually holding it from anywhere up to 10-20 years.
What you are doing is trying to create a long-term passive income from those rents and as the market rents go up so does your profits. So there are a lot of benefits to doing a Buy Rent to Hold.
I mean the offset to these advantages is that as the property gets older it requires more maintenance so there are more costs. So are you really making profits? It really depends on the condition of the property and what you have to put in.
In Rent to Own investments, they are typically 3-5 years so it’s like leasing a car.
ou buy the property knowing that there are not going to be any costs associated with major upgrades like the roof, appliances, roof, and things that are major cost items. So you buy it knowing that you are not going to have to touch any of that for 3-5 years. At the end of the 3-5 years when the deal is done you just flip it and sell it to the tenants that are doing the Rent To Own and you exit. The disadvantage with Rent to Own to that is that you have to go out and find a deal every 3-5 years.
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So there are the main differences between rent to own and rentals.