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Should You Offer Rent-to-Own Options?

Model Houses Next to Stacks of CoinsOne creative way to invest in Houston Heights rental real estate is to offer tenants a lease that includes a rent-to-own option. Rent-to-own agreements also called lease options, help tenants purchase a home they might not otherwise qualify for. This is also one way for the property owner to sell the 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, like many things, it comes with benefits and risks for everyone involved. This is why it is important to be knowledgeable about rent-to-own agreements before offering one to your tenants.

Benefits for Tenants

One of the obvious benefits for a tenant is that a rent-to-own agreement will allow them to apply their rental payments toward purchasing the home. Under such arrangements, as tenants make rental payments, they also build equity in the property which may help them get better financing terms once they can qualify for a mortgage. At the same time, most rent-to-own agreements do not require that the tenant buy the home, thus they can easily walk away from the deal at any time without negatively impacting their credit.

Benefits for Property Owners

Offering a rent-to-own option can also hold many benefits for property owners. This is especially true for those who have been trying to sell their property through conventional means with no success. Most rent-to-own arrangements require the tenant to pay a large down payment to begin the option period. That can put a lump sum of cash directly into your pocket. Aside from that, you will continue to receive regular rental income, often at a higher rate than what your property would normally bring. 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 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

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. 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 in the event that your tenant cannot secure financing at the end of the option period, even with the advantage of the rent-to-own agreement. In case that happens, you could face some difficult decisions regarding your property and the tenants occupying it.

Finally, suppose the market drops during the option period. Your tenant may not be willing or able to buy it for the original price you agreed upon, and you get stuck with a devalued property. Depending on how much the market drops, the option fee may not cover the loss the lower price your property is likely to bring.

As you can see, the decision to offer your tenants a rent-to-own option is one that requires careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Affiliates. Our Houston Heights property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 713-539-5765 or contact us online to learn more!

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