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Should You Offer Rent-to-Own Options?

Model Houses Next to Stacks of CoinsOffering tenants a lease that include a rent-to-own option is a creative way to invest in Amsterdam rental real estate. 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 one way, as well, for a 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, as in all things, there are benefits and risks for both parties involved. For this reason, it is critical that you learn everything you can 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. With this arrangement, the tenant builds equity in the property each time they make a rental payment, which could help them secure better financing terms once the time comes to qualify for a mortgage. At the same time, most of these rent-to-own agreements don’t require the tenant to buy the home, making it easy for them to walk away from the deal at any time without any negative impact on their credit.

Benefits for Property Owners

Offering a rent-to-own option can also hold many benefits for property owners. This could be a feasible alternative if you have tried selling your property through more conventional means but haven’t had much success. Many rent-to-own arrangements require the tenant to pay a large amount as a down payment to begin the option period. This means you will have a lump sum of cash at your disposal. 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. Those payments, including the option fee, are forfeited in favor of the property owner if the tenant should decide 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 have to wait several years to receive the full price for the property. Should you need the money before that, you will not have access to 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 case, you might have to face difficult decisions regarding your property and the tenants occupying it.

Finally, suppose the market drops during the option period. There is a possibility that your tenant will not be willing to buy it for the price you originally agreed upon. You will then be left 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 Bozeman. Our Amsterdam property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 406-586-2226 or contact us online to learn more!

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