What is Rent To Own?
What is a Rent To Own/ Lease to Own/ or Lease Purchase Investment Property and what’s in it for you as an investor? In order to figure out the benefits of investing in a Rent To Own, we need to find to first understand what a rent to own investment is and what makes it different from other traditional real estate investment strategies such as the Buy And Hold strategy.
The Buy And Hold investment is strategy is probably the most common, or well-known real estate investment strategy. An Investor buys a property and finds tenants who want to rent their house or apartment unit. The investor is never out of pocket on a monthly basis so long as their rental units are not vacant and the rent they receive from the tenant is enough to cover the mortgage, property taxes and insurance. The returns from this investment strategy is typically realized through tenants paying down the mortgage (creating equity for the investor) while the investor holds the property for a medium to long term hoping to capture capital growth by selling the property for more than what they bought it for. This is a great strategy if you have a long time horizon (so the amount of time needed to realize the returns from the proceeds of the sale of the property) and if you like being a landlord. Investors also need to spend a lot of time researching markets where there are positive prospects for homes increasing in price and economic fundamentals are strong.
A Rent To Own/ Lease To Own/Lease Purchase investment shares some of the Buy And Hold investment features, but is a very different type of property investment. A Rent To Own investment is one where an investor purchases a property and rents it to a tenant for a term of 3-5 years and the tenant signs a contract to buy it back from the investor at the end of the term at a pre-determined sale price. Tenants who enroll in this type of program want to be home owners, or ex-home owners where credit has stopped them from being renewed for traditional bank financing because of poor or un-established credit. The investor and tenant enter into a contract where the tenant agrees to pay a premium monthly rent that not only covers your mortgage expenses, insurance and property taxes, but also leaves the investor with positive cash flow each month and generally more than 20% higher than market rent. The above market positive cash flow for the investor and is one of the financial benefits of the Rent To Own investment strategy that allows the investor to buy more properties.
The Rent To Own transaction is based on a lease term, which is agreed to before an investor purchases the property. The Rent To Own investor also receives a non-refundable deposit up front from the tenant (typically 5-10% of the purchase the price, or between 10-20% of the existing equity), which gets applied to the tenant’s purchase at the end of the lease term. With a Rent To Own, the investor is guaranteed a tenant before they purchase the property and the property has rental income from day one. Also, the investor on a Rent To Own doesn’t have to be a landlord, as the maintenance and upkeep of the property is the responsibility of the tenant. A Rent To Own investment strategy is based on passive income and in many cases is a much easier way for investors to build wealth.
Please note that all real estate transactions has some degree of risk, having a security deposit of 5-20% of the value of the home is a lot safer than first and last month’s deposit on a buy and hold deal. Our default rate exist generally at about 15% since we cannot guarantee the performance of the deal due to sickness, job loss, and marriage issues. Every real estate investor must do their own due diligence, we will provide you all the data to make an intelligent decision on your investment.