Rent to own deals appear to be becoming more popular again. What are the real pros and cons for investment property owners?
As home prices keep growing, and rent remain high, but mortgage lenders keep underwriting tight, renting to own, lease options, and seller held mortgages all appear to be getting more common again. They are highly desired by tenant-buyers, and can be highly profitable for real estate investors. What should you consider before making the leap?
The Pros of Offering Rent to Own Deals
There are a variety of benefits of this strategy, including the following.
- Easy Exit in Tough Markets
Offering a rent to own option can provide landlords an easy exit, even in tough or declining housing markets. Just make sure it is priced in a way that is appealing and the right prospects can afford.
- Higher Sales Prices
Rent to own tenants are mostly concerned about move-in costs and monthly payments. They care little about the actual sales price. This can help you get far more for your property.
- Passive Income
Creating a seller financed mortgage note can deliver passive income with a lot less headaches. You no longer need to worry about tenants, maintenance, and all the time and risk involved. You just get monthly payments. The note created is also a new asset which can be sold and cashed in on whenever you like.
- Providing a Valuable Service
There is a huge need for this service. Millennials and families are having a tough time in the rental market. They will find many benefits in homeownership. They may have good credit and incomes, but just fail to qualify for a conventional bank loan due to paperwork quirks. Give them a chance.
The Cons of Offering Rent to Own Deals
There are some potential downsides to these arrangements to. Make sure you know them.
It may be a little more expensive and time consuming to fix a default situation under these deals than with just a straight tenant.
- Locked In
You’ll be bound by your agreement for a while. This could be 6 to 24 months or more. You will have to stick it out, even if the market changes.
- Less Cash Now
You’ll be getting less cash now than in a traditional sale. However, you’ll probably get a lot more over time.
Seller financing is still a bit of a cloudy space due to Dodd-Frank and other regulations. It is legal. Just consult an attorney so that you structure it right, with the right paperwork, and stay protected.
There are both pros and cons to providing rent to own deals as a property owner. Do the math. Remember your big goals. Is it worth it to you?