A creative way to invest in Little Rock 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. This is also one way for the property owner to sell the 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. This is why it is important to be knowledgeable about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The top benefit for a tenant is that a rent-to-own agreement typically allows 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. If you have tried selling your property through more conventional means but haven’t had much success, this could be a good alternative. Under most rent-to-own arrangements, the tenant often pays a large down payment to begin the option period. That can put a lump sum of cash directly into your pocket. Not only that, but you will also keep receiving regular rental income, often at a higher rate than what your property would normally bring. Also, most agreements allow the property owner to keep the option fee and rental payments, regardless of what your tenant decides.
Risks for Tenants
Under a rent-to-own agreement, tenants also face some risks. The monthly payments under a rent-to-own option tend to be higher than the average rent which may leave tenants short on cash down the road. All the payments, including the option fee, are forfeited if the tenant decides to walk away from the deal. The tenant also covers all costs of maintenance and repair on the property, which is an advantage for property owners but adds 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. 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. 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. 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.
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 Hometown. Our Little Rock property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 501-701-4702 or 501-303-6870 or contact us online to learn more!
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