One of the more innovative methods to invest in Fort Worth rental real estate is to offer tenants a lease that includes a rent-to-own option. Rent-to-own agreements, also called lease options, are normally provided to help tenants purchase a home they might not otherwise qualify for. It is equally a strategy for the property owner to sell the property without listing it with a real estate agent.
In most ways, offering your tenants the option to rent to own your rental property sounds like the best deal for both sides. But in reality, there are both benefits and risks for everyone involved. Due to this, it’s essential to know as much as you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The most apparent benefit for a tenant is that a rent-to-own agreement usually allows them to apply their rental payments toward purchasing the home. Under such provisions, the tenant is building equity in the property each time they make a rental payment, which may easily help them secure better financing terms if the time comes to qualify for a mortgage. Moreover, some rent-to-own agreements do not require the tenant to buy the home, leaving them totally free to back off from the deal at any time without negatively impacting their credit.
Benefits for Property Owners
Providing and offering a rent-to-own option can additionally hold quite a lot of benefits for property owners. This is mainly true if you’ve tried to sell your property through more conventional means but really haven’t had much success. Under many rent-to-own arrangements, the tenant always pays a large down payment to start the option period. That can put a lump sum of cash directly into your pocket. You’ll similarly continue to receive regular rental income, in many cases at a higher rate than what your property would typically bring. Disregarding what your tenant decides, most agreements indeed allow the property owner to keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants definitely also experience a few risks. The monthly payment under a rent-to-own option is usually higher than an average rent, which may leave a tenant strapped for cash down the road. Those payments, plus the option fee, are forfeited if plans change and the tenant decides to walk away from the deal. The tenant similarly takes charge of all of the cost of maintenance and repair on the property, which may be best for property owners but adds to the tenant’s financial burden.
Risks for Property Owners
There are certain ways that a rent-to-own agreement can hold risks for property owners, moreover. Unlike a conventional sale, you may wait years to receive the full price for the property. If you need the money before that, you won’t have access to it. That can gravely inhibit your ability to invest in future properties or fund a retirement account.
Another potential risk transpires if or when your tenant cannot secure financing at the end of the option period, even with the added advantage of the rent-to-own agreement. If that befalls you, you will face various difficult decisions regarding your property and the tenants occupying it.
One last thing to consider is when the market drops during the option period. If that is so, your tenant may not be able or willing to buy it for the price you originally agreed upon, leaving you stuck with a devalued property. Conditional on how much the market drops, the option fee may not compensate for the lower price your property may likely bring.
So as you can see, settling on whether or not to offer your tenants a rent-to-own option is a huge decision that necessitates mindful consideration. In such a case, it can be helpful to have the advice of a local market expert like Real Property Management One Source. Our Fort Worth property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 214-960-1612 or contact us online to learn more!
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