The mere mentioning of the words house, investment and rent to own in one sentence makes nay-sayers to come out in a might force. However, no one can really blame them. If you just take it upon yourself to do a quick search on the internet about rent to own, you will be met with horror stories and some shocking revelations. Nonetheless, the fact is that rent-to-own or simply RTO is a legitimate real estate investment strategy that many well intentioned and ethical investors and companies have practiced. If done well, this strategy can be very profitable.
The tightening of mortgage lending rules has made many people to consider rent to own alternatives as the only way out of realizing their dream of ever owning a home. This program is certainly designed for people whose credit report has some blemishes but many others like recent immigrants and self employed are considering such alternative options. These are people who are able to pay their bills reliably only that they have no credit history to show this. Property investors who are ready for the rent to own alternative financing program have found an excellent opportunity in this niche.
Rent to own is a legitimate investment option and real estate investors can use this strategy to generate a reliable cash flow and can be very lucrative. Generally, rent to own investments come in two main types: purchase lease option and sandwich lease option. You should keep in mind the fact that even though the two types of investment work generally the same, there can be very significant differences from one company to another as to the actual specifics of how the deals are implemented.
- 1. Purchase Lease Option
Ideally, the most common agreement that comes into most people’s mind when talking about rent to own is the purchase lease option. This kind of agreement works in a rather simple way whereby the investor simply purchases the property in question of behalf of the tenant- buyer. The tenant buyer is actually someone who needs to purchase a house but can’t qualify for the conventional mortgage for whichever reason. Then, the investor leases the property back to the tenant an agreed price and for predetermined time period which is usually two- five years.
When the agreement comes to an end, the tenant- buyer can buy the house at an increased predetermined value but also has the option of walking away. In case the tenant- buyer decides to quit the deal, the investor keeps the option fees if any alongside other accumulated credits that was amassed during the agreement duration and also keeps the house. This is a low risk and feels good investment strategy from the perspective of an investor and has an exit strategy. The investor owns the property and where the tenant buyer opts out after the end of the lease; the investor keeps the initial deposit, principal pay- down, monthly cash flow and owns the property after all.
- 2. Sandwich Lease Option
This is yet another option you have when it comes to rent to own investments that work in a rather simple way. With sandwich lease option, you first find a person who is motivated in selling a house or one who owns a house but doesn’t want the house any more probably due to associated mortgage payments. Now, you negotiate with the seller for a lease option agreement which you get the opportunity and opportunity of buying the house anywhere between one and five years. You look for a tenant buyer interested in buying the house through rent to own financing and then issue a purchase lease option agreement. When the agreed contract comes to an end, the deal closes and the tenant buyer decides to buy the house or not.
Sandwich investment options are a great investment opportunity and investors have an opportunity of managing their property investments while still profiting from them. This strategy works incredibly well in a market where houses sell slowly and since you will be dealing with a highly motivated seller, it is possible to get house at a below the market value and the savings can be used for making to offer made to a tenant- buyer more attractive. However, sandwich lease option still has its share of downsides. For instance, if the tenant buyer has a problem like not paying the rent on time, you are still liable to pay the seller his payments. You can significantly eliminate this risk by screening your tenant- buyer carefully even though this doesn’t eliminate the problem totally.
In addition, finding a tenant- buyer who is ready for a sandwich lease option agreement can be quite hard since you must get someone who is interested with the particular property unlike in the normal purchase lease option where a potent tenant- buyer can shop for their dream house on MLS. Nevertheless, sandwich lease options have a great potential of producing huge returns for investors as they have a ROI of between 20% and 30%.