The term “win-win” sounds so cliché nowadays, but there really isn’t a better way to describe rent to own. These programs have got a bad wrap due to some shady companies who prey on those in need, but the real truth is that when properly setup and well-executed, rent to own programs offer a winning solution for both parties in the transaction; the tenant-buyer AND the investor. Similar to other lending products, rent to own isn’t an ideal solution in every situation, but for the right tenant-buyer it can work fantastically well as a win-win solution.
3 Situations Where Rent to Own Can Help
The 3 most common obstacles to obtaining a traditional mortgage are 3 situations where rent to own can be a great solution:
- Credit – Tenant-buyers commonly have trouble getting traditional financing because they have not yet established credit or have done something to damage their credit. They then turn to rent to own as a solution.
- Down payment – Tenant-buyers often have great incomes but can’t qualify for traditional financing because they don’t have the down payment required or have some credit issues but not enough down payment to work with a private lender.
- Income – Often times income is also an obstacle to obtaining financing. Banks do not look at self-employed or commissioned individuals the same way they look at salary earners.
There are other circumstances which may create an opportunity for a win-win rent to own deal, but these are 3 of the most common. Essentially any time someone is unable to obtain traditional mortgage financing to buy a home, rent to own is an important alternative to explore.
How the Tenant-Buyer Wins in Rent to Own
In each of the 3 scenarios above, rent to own is able to offer an ideal solution. For tenant-buyers who lack the down payment they need, rent to own programs ensure their initial down payment plus monthly rent credits will add up to the down payment they’ll need at the end of their rent to own term. For those with credit problems or where income is a concern, a rent to own term gives them the time they need to establish or repair their credit, or the time required to demonstrate a steady track record of income. In each case, a properly designed rent to own program will setup the tenant-buyer in a strong position to qualify for financing by the end of the rent to own term.
How the Investor Wins in Rent to Own
The investor sees several benefits in a rent to own transaction. First, the investor receives some sort of deposit from the tenant-buyer which reduces the out-of-pocket expense to purchase a rental property, but more importantly the deposit reduces the investor’s risk. Second, the tenant-buyer pays above market rent since a portion of their monthly payment is an option credit, but during the rent to own term this creates stronger cash flow for the investor. Third, compared against a standard rental property, the investor has less work to do since the tenant-buyer is responsible for repairs and maintenance and will treat the home as their own because they have provided a deposit and the purpose of the rent to own program is for them to buy the home at the end of the term. These 3 key benefits create a more passive investment option with strong returns, less risk, and a pre-determined exit strategy.
The tangible benefits that both the tenant-buyer and investor receive make it clear that rent to own can be a win-win strategy for everyone involved. From personal experience I can assure you that it is still possible to make returns of 30%+ per year while truly helping your tenant-buyer and keeping their best interests at heart. To me, that is a smart and rewarding way to create cash flow today and long-term wealth for tomorrow.