Rent to own real estate with option to purchase brings quality tenants. These properties will also bring rent amounts higher than current market rates,
a non refundable upfront fee for the lease option usually 3 to 5% of the value of the property and 5 to 15% more for the purchase price.
Investors get three paydays
1. option fee -immediate cash flow
2. monthly rent -short term investing strategy
3. purchase - long term investing strategy 1-3 years
Rent to own real estate strategies are also known as Lease options.The investor simply becomes the landlord, leases the property to a buyer who becomes the tenant. Properly set up your lease options always use 2 completely separate contracts;
a Lease Agreement and a Option to Purchase Agreement.
The tenant has the option to buy the property for a predetermined price at any time before the lease expires. In return for the privilege of having the option to purchase your property, the buyer pays you a non-refundable option fee.
You also get low vacancy rates and No maintenance or repairs.
And taxes are deferred on the money option until time of purchase.
Sales price of the rent to own real estate will be at top market value. The option to purchase agreement will have a stated fixed selling price, that's 5-10% more than the current market value. The price should reflect the amount of appreciation during the lease that the property will incur.
And it needs to reflect a convenience fee for the generous consideration you have given to the conditions in the contract and because of their credit score. Don't call it a convenience fee just add it into the %.
The lease agreement will contain a security deposit that will be transferred upon purchase to the down payment. The Option to Purchase agreement will contain an option fee, usually 5% ish. This is what you (the investor) gets to put in your pocket no matter if they buy or not. And it is always non refundable.
Never give credit for a portion of the rent to go to the closing costs. Instead keep the rent at a fair enough price to allow them to save for their down payment and closing costs. Its important to set your tenant up for success. Put them into a property that they can afford. Its essential because although many times the tenants will not exercise their option to purchase within the specified period, some will.
These are the ones that have proved they can handle the financial responsibility. Here's is your perfect opportunity to offer owner financing and create a cash flow note and long term passive residual income.
It can all sound complicated but basically rent to own properties are just multi layered buy and hold strategies with owner finance using arbitrage techniques.
Late rent voids the option to purchase contract, so you'll always get the rent on time. If they default, the process is eviction not foreclosure which is quick and cheap.
Always use Private money to purchase properties that you'll turn into lease options. By using OPM and money from IRAs you'll always have an endless supply of funds.
Also use creative investment strategies like wrap around mortgages and subject to contracts that let you control the property with a small amount of money.
When you know how and have your strategies lined up you create the possibility to be paid in many ways and many times from just one piece of rent to own real estate.
You're looking for tenants that have blemished credit, in this market it usually means a foreclosure. We especially like the ones that have enjoyed home ownership before, have a family, and a stable job. And we're not talking white collar executives, no instead we like those blue collar and lower management professionals. And they're less likely to be transferred.
It is an excellent way for people with damaged credit, that want home ownership and cannot obtain a traditional loan. And that also means first time home buyers without any credit history. Also it creates a trial run for wanna be home buyer's that aren’t sure if they're ready to purchase.
Best houses are single family homes in neighborhoods with good schools.
Look for newer, starter homes needing only cosmetic paint and landscape that the tenant/buyer can do. Check out properties with high (DOM) days on market. Properties that don't have a large amount of equity today can be positioned to make money with built in appreciation. Builder's close outs are also a good source.
The tenant/buyers feel like it's their home,
which creates a pride of ownership. They even add small upgrades that they can enjoy as well as adding value to the property. They plant flowers maintain the lawn and when a minor repair is needed, they take care of the rent to own real estate.
Since you are still the owner you will continue to pay the insurance and property taxes until the time of the purchase. (Always encourage your tenant to get liability insurance for their possessions.) And in the mean time, you get to take full advantage of all write offs and tax benefits.
However, a surprising amount of tenant / buyer optionees often fail to improve their credit rating or save for closing costs and a down payment during the rental period and as a result do not exercise their option to purchase.
Which from the investor's view point is not all bad.
Sure you have an empty house without tenants but that just lets you create another rent to own real estate deal with 3 new paydays.