A creative way to invest in Wyckoff 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. As a property owner, this is also a way for you to sell a 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. But there are still some benefits and risks for everyone involved. It is best to know as much as you can about rent-to-own agreements before you offer 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. This is a great option if you’ve 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. That means you receive a lump sum of cash directly into your pocket. 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. Since the monthly payment under a rent-to-own option is usually higher than the average rent, your tenant could have some cash trouble 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. Before that, you won’t have access to the money even if you need 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.
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 a Real Property Management Concierge. Our Wyckoff property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 201-514-1603 or contact us online to learn more!
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