An alternative way to invest in Clearwater rental real estate is to offer tenants a lease that comes with a rent-to-own option. Rent-to-own agreements, also called lease options, are sometimes provided to help tenants purchase a home they might not otherwise qualify for. It is also one way for a property owner to sell off 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. However, there are still benefits and risks for everyone involved. As a property owner, you must know as much as you can about rent-to-own agreements before you offer them to your tenants.
Benefits for Tenants
A major benefit for a tenant is that a rent-to-own agreement lets them apply their rental payments toward purchasing the home. Under such arrangements, the tenant is building equity in the property each time they make a rental payment. This could help them secure better financing terms once the time comes to qualify for a mortgage. At the same time, rent-to-own agreements do not require the tenant to buy the home, leaving them free to walk away from the deal at any time without a negative impact on their credit.
Benefits for Property Owners
Offering a rent-to-own option can also hold many benefits for property owners. If you have tried selling your property through more conventional means but haven’t had much success, this could be a good alternative. Under many rent-to-own arrangements, the tenant is required to pay a large down payment to begin the option period. That is a lump sum of cash directly into your pocket. You will also continue to receive regular rental income, which is usually at a higher rate than what your property normally brings. Even if your tenant decides otherwise, most agreements allow the property owner to keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants also face some risks. One of these is the higher-than-average rent. The monthly payments under rent-to-own options are usually higher than average, possibly leaving a tenant strapped for cash down the road. All payments made, plus the option fee, are forfeited in case the tenant walks away from the deal. The tenant also bears all the cost of maintenance and repair on the property, which is an advantage for property owners but can 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. In contrast to a conventional sale, you may wait years to receive the full price for the property. You won’t have access to the money before that, even if you need it. That can severely hamper your ability to invest in future properties or fund a retirement account.
Another potential risk arises if or when your tenant cannot secure financing at the end of the option period despite the added advantage of the rent-to-own agreement. In that scenario, you may have to face some difficult decisions regarding your property and the tenants occupying it.
Finally, suppose the market drops during the option period. Should that happen, your tenant may decide not to buy it for the price you originally 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.
Clearly, offering your tenants a rent-to-own option is a big decision that needs careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Empire. Our Clearwater property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 813-867-7300 or contact us online to learn more!
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