They are an investment strategy where a person rents the property from you with an option to buy the property sometime in the future. How it is structured is you buy a property or you may already own a property and you want to convert that property into a rent-to-own. You decide that you don’t want to rent out that property anymore … for whatever reason.
There are lots of motivators why an investor wants to be in a rent-to-own situation and lots of motivators why a tenant wants to do a rent to own.
The basic premise is that you buy a property or you have a property … the renter moves in and rents that property from you for a specified price, a specified lease amount. A portion of that lease payment may go towards their down payment or may not depends on how much deposit they have.
Usually when the tenant moves in initially they provide you with a nice upfront amount … normally referred to as an option consideration or a deposit. You use that amount of money to secure their option to purchase that property in the future
Then what the tenants do is they rent the property from you for anywhere from 3 to 5 years depending on the nature of the agreement, the amount of down payment … the situation will vary. There are all kinds of different scenarios that you might put together for a specific rent to own.
Finally after that period, they would buy the property for the previously agreed to price. That price is usually determined at the start of the contract so when it comes time to buy the property in three or five years, there is no dispute over what that price will be.
Start with the deposit … the tenant makes monthly payments where they build up a credit, maybe or maybe not, and then after the three or five year period they purchase the house. So the tenants are renting with an opportunity to own the property … thus rent-to-own.
Why would someone do that? The tenant has many motivators … they can’t get approved for a mortgage for whatever reason. Whether they have a bad credit, no down payment and those are usually factors as a result of other things … they lost their job but now they have one, they had a sickness or death in the family but now they have recovered. There are a number of scenarios that would determine why someone wants to do a rent-to-own as a tenant buyer.
As an investor, they are very good money makers.
- You have the initial deposit that can go towards the purchase of the property
- You can almost guarantee cash flow with these rent-to-own deals because usually the tenant is paying to cover all the costs plus they add a credit to the monthly payment. For example, if your monthly payment is $1500 to cover just the costs, and your actual lease payment is $2000, you are making $500 Cash flow
- At the back and you’re making a profit because … let’s say you bought the property for 300,000 and you may be selling it to your tenants for 330,000
- While the tenants are renting they are paying down your mortgage principle
This is a good win-win situation here.
- It’s a win for the tenant because they get the property that they want now. They get a forced savings program to save for their down payment and you help them build their credit
- It’s a win for the investor because you now have an investment property that has very little maintenance associated with it. There are two or three income sources and these deals pretty much guaranteed to cash-flow.