Rent to own homes are a very interesting section of real estate investing. They are a great way to get into real estate investing if you don’t have a good starting point.
They’re that weird no-man’s land that’s not often talked about, but can be a real win-win solution for both the seller and the buyer.
What is a Rent-to-Own House?
An agreement in which you commit to renting a home for a specific period of time with the option to buy the home before the end of your lease.
Rent-to-own homes are for someone who wants to own a home but can’t qualify for a mortgage yet. The renter has the option to buy the home at the end of their lease. The lease contract would include an agreed-upon sale price, and part of the rent payments would essentially be going towards a downpayment.
Mr. FIREescape Rent-to-Own Homes Story Time
My friend (who’s also a real estate investor, not just some guy) had a $300,000 home that he was renting out for $18,000 per year. (That’s 6% cap rate.) He was planning on selling his home, but decided to try the whole rent-to-own thing.
He found a tenant, and the agreement was that he’d pay 20% more (so that’s $21,600 per year) for 3 years, and then buy that home for $400K at the end with my friend covering the down payment.
Profit all around!
Anyway, that tenant couldn’t make his rent payments anymore, but wasn’t too keen on getting evicted after mentally committing to owning that house and paying extra. Can’t say I blame the guy, but the deal was off and it became an issue for both sides.
Eventually the eviction did carry out though, and that extra profit the landlord made covered the time he wasn’t getting any rent. And he ended up selling the house for $400K to a different buyer. So I guess it worked out.
My takeaway – This deal can definitely be win-win and you can lock into some hefty profit right off the bat. But you could also bump into some challenges.
Read my full recommendation at the end.
Why rent-to-own homes are attractive to tenants:
If you’re just starting out on your quest to home-ownership, you basically have nothing to lose with rent-to-own homes.
- You can start working towards buying a house even before you’d be ready to otherwise. Most people have no issues making their monthly mortgage payments but have a hard time coughing up the down payment, but you get to skip the hard part.
- You get a chance to build up your credit score by paying your own home’s rent.
- You can avoid most roadblocks that come with getting a mortgage approval.
- You can lock into a good price now. If home prices in your area are growing at an exponential pace, it might be nice to lock-in a price right now.
How to find a rent-own property as a tenant:
The best way to find good rent to own homes is to connect with a good real estate agent. They’ll be able to find something good for you.
You could also connect with a seller or a landlord directly and propose the idea of rent-to-own.
Who knows, maybe the landlord is planning on getting rid of his property soon, and would be happy to reach a win-win solution.
And maybe a seller isn’t too happy with the current market conditions, and would be okay with holding off for a few years.
These types of deals are fairly common, so think win-win and ask for what you want.
Why rent-to-own homes are great for landlords:
1 – Feel-Good Points
Okay, this might sound cheesy, but I have a soft spot for knowing that someone can find a way to buy their own home when they thought it was impossible.
I’m not normally a gushy-feely kind of guy, but after reaching a certain level of success, you get to a point where you want to give back. And when you give families a chance to own homes, you get some major feel-good points.
2 – Less Maintenance Than Normal Rent Real Estate
Your tenants will take WAYY better care of their rent-own property if they’re going to take over it some day. This means that rent-own real estate is less maintenance than normal rent real estate.
3 – Lock in Mega Profit on Day 1
If you’re not super-committed to the rent real estate investor lifestyle, you have nothing to lose by agreeing to sell that house down the line. But you can still lock-into a profitable cash flow, AND lock into a profitable sale price.
4 – The Lease is On Your Side
The tenant doesn’t have to go through with the rent to own home’s purchase at the end of the lease, but you get to keep the profit from the above-average rent to own home’s rent!.
If that happens, you can just start again.
Of Course, Rent-to-Own Homes Are Not All Sunshine and Unicorns
There can definitely be some downsides to rent-own real estate investing.
- You may be locking into a sale price that’s lower than you could get. While this is a pro for tenants, you might find yourself cursing your past-self decisions if home prices rose way more than expected.
- You could get a bad tenant you can’t get rid of. If they’re mentally committed to keeping that home and just forfeited all that money over to you, you’ll have a hard time getting rid of them even if they’re a tenant from hell.
Mr. FIREescape’s Rent-to-Own Homes Recommendation
Personally, I don’t own one. While I like the idea of locking into a sale, I want the freedom to sell when I feel like it. Buying a house is a lot of work, and I don’t want to constantly go through that ordeal. If I buy a house, I want to sit on it.
Although, I am considering it for a very nice family that’s rented from me for a long time.
So my recommendation is – do it if you’re not planning on being a real estate investor for a long time, or you’re planning on offloading your properties anyway. Otherwise, just stick to normal rent real estate investing.
Rent-to-Own Homes FAQ
Are Rent to Own Homes Legit?
Rent to own homes are a legitimate and common way for people to buy a home if they cannot qualify for a mortgage. You would sign two agreements. One for the purchase price, and one for the lease, and you’d typically pay a little extra per month with that extra money going towards your down payment.
Is Rent to Own Worth It?
Rent to own homes are a worthwhile option for people who want to own their home but cannot qualify for a mortgage. You would pay a bit extra per month but part of that payment would go towards your down payment. You also get to build up your credit score while having a place to live.
Is Rent-to-Own a Good Idea?
Overall rent to own homes are a good idea for both parties. Tenants who can’t buy a house outright get a chance to get into the market and build credit. For the owner, you get a very invested tenant who will take care of the house and has a chance to forfeit their upfront downpayment option money.