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Pros and Cons of Offering Rent-to-Own Options

Have you ever thought about selling your rental property through a rent-to-own agreement? A rent-to-own agreement allows a tenant to put their monthly rent payments toward the final purchase of the rental home. After an agreed-upon amount of time, the renter can then purchase the home for the price stated in the agreement. Would you ever offer rent-to-own options for your tenants? Let’s review some of the pros and cons.

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What Does Rent-to-Own Mean?

Person standing between 'own' and 'rent' options, symbolizing rent-to-own options. understand the differing needs of landlords and tenants. Most rental owners want to rent their property for years on end to earn rental income each year. However, some may want to rent for the time being and eventually sell it for a larger profit.

Renting to own is an arrangement where tenants have the option to buy the property they’re renting after an agreed-upon period of time. This allows potential buyers to build equity while renting and gives them time to improve their finances or prepare for homeownership before committing to a purchase. That said, there are two types of agreements–rent-to-own and lease-purchase. 

  • Rent-to-Own Agreement- A rent-to-own agreement is a contract that allows renters the option to buy the property after a set period. However, they’re not obligated to buy it if they decide they don’t want to. Generally, a portion of the monthly rent payment goes toward a future down payment or purchase price. This gives tenants some flexibility to decide later on if they want to buy the property.
  • Lease-Purchase Agreement- A lease-purchase agreement is similar, but there’s one major difference–the tenant is legally obligated to buy the property at the end of the lease term. This type of contract is more beneficial for sellers because it guarantees a buyer. However, it’s not always great for renters because they have to commit to the purchase, even if they decide later on that they don’t want to. 

Benefits of Rent-to-Own Agreements

Offering rent-to-own options to your tenants can offer several benefits, especially when the housing market is slow or highly competitive. Here are some of the main advantages of rent-to-own agreements

  1. Consistent Rental Income
  2. Higher Rent Payments
  3. Lower Vacancy Rates
  4. Fewer Maintenance Costs
  5. Less Selling Pressure
  6. Potential for a Guaranteed Sale

Consistent Rental Income

One of the main benefits of offering a rent-to-own agreement is getting consistent rental income. After all, if the tenant aims to purchase the property at the end of the lease term, they’re less likely to miss a payment. This leaves you with consistent income and a potential sale at the end of the process. 

Agent presenting a contract for a rent-to-own agreement.Higher Rent Payments

Generally, rent-to-own options allow landlords to charge slightly higher monthly rent to reflect the added value of the purchase option. In turn, this can generate additional revenue while covering the cost of providing the option to buy. 

Lower Vacancy Rates

Tenants in rent-to-own agreements are more likely to stay in the rental long-term since they intend to purchase it eventually. This lowers vacancy rates for landlords and reduces tenant turnover costs. It’s a win-win for both parties–tenants have a stable and consistent rental home, and landlords don’t have to worry as much about vacancies. 

Fewer Maintenance Costs

Since the tenant plans to own the property in the future, they may take better care of it. After all, taking good care of it makes less work for them in the long run. That said, some rent-to-own agreements even require tenants to take care of minor maintenance issues instead of the landlord. This saves time and ongoing expenses for landlords and property managers. 

Less Selling Pressure

For landlords in slower housing markets, rent-to-own agreements allow them to collect rental income while waiting for a better time to complete the sale. So, if the market is down and it’s not a good time to sell, you can rent it until the market improves, and you can sell at a more favorable price. This is especially useful in fluctuating real estate markets. 

Potential for a Guaranteed Sale

Depending on the type of agreement you have with your tenant, you could have a guaranteed sale on your hands. That said, lease-purchase agreements guarantee the sale of the property. In this scenario, landlords can secure a buyer upfront without having to list, market, or go through the traditional sale process. 

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Risks of Offering Rent-to-Own Options

While there are plenty of benefits to rent-to-own options, there are also some risks to consider. Don’t overlook these potential disadvantages. 

  1. Uncertain Sale Outcome
  2. Potential Loss of Appreciation
  3. Risk of Non-Qualified Buyers
  4. Longer Sale Process
  5. Potential Legal Complications

Uncertain Sale Outcome

If you have a rent-to-own agreement instead of a lease-purchase agreement, you don’t know what the tenant will do. They may decide not to buy the property at the end of the lease. In this case, you’d have to go through the process of finding a new tenant or buyer, which can delay your desired timeline to sell. 

Potential Loss of Appreciation

A rent-to-own agreement locks in the future purchase price at the beginning of a lease. As such, this could mean you lose out on potential appreciation in a rising market. If the property value increases significantly, you lose out on those potential gains. 

Risk of Non-Qualified Buyers

With rent-to-own options, you may get tenants who aren’t necessarily qualified to buy a house. If they don’t qualify for a traditional mortgage, there’s probably a good reason, like bad credit or lack of income. Unfortunately, if they can’t improve their financial situation during the lease, you risk them being unable to purchase the property as planned. 

Hand holding house-shaped keychain, symbolizing rent-to-own homeownership opportunity.

Longer Sale Process

If you’re looking to sell your property ASAP, a rent-to-own agreement probably isn’t the best way. After all, you have to wait until the end of the lease agreement, and the tenant may decide they don’t want to buy it after all. So, if you’re in urgent need of liquidity, a rent-to-own agreement may be a financial drawback.

Potential Legal Complications

Some states have specific regulations governing rent-to-own agreements, especially in residential real estate. Non-compliance with these rules can lead to legal trouble or invalidation of the contract. Additionally, poorly constructed contractors or misunderstandings can quickly lead to disputes, especially if the tenant fails to meet their obligations. 

Protect Your Investment With BMG

It’s important to know your options when offering rent-to-own agreements. Knowing the different types of agreements and some of the pros and cons can help you decide the best move for your rental property. If you’re looking to sell eventually but still need consistent rental income for the time being, you can benefit from rent-to-own options. However, if you need to sell your property immediately, you may need a faster solution. 

Either way, you want to keep your property occupied, protected from damage and well-maintained. One of the best ways to do this is with professional management. Companies like Bay Property Management Group can help! We offer comprehensive rental management services, including rental marketing, tenant screening, rent collection, and more. Contact BMG today to learn more about our services in Baltimore, Philadelphia, Northern Virginia, and Washington, DC.