I have completely shifted my focus to rent to own since I am sold on this being the best investment strategy for me at this point in my life and real estate investing career. To demonstrate why I am such a fan of rent to own investing, I will share three real life experiences I experienced within my first couple months of investing in rent to own property.
If you want to skip to the moral of the store, it is this:
Investing in rent to own is a little more work up front, but it makes life much easier for the investor.
Like most investors you are probably looking for the most profitable and passive strategy, so read on to learn more about why I <3 RTO!
Reason #1 – Tenant-buyers are responsible
Soon after closing my last rent to own deal, some of the tenants in my regular buy-and-hold properties started to call about little problems that popped up. My property manager got calls about various issues such as roofing, clogged plumbing, a furnace that wouldn’t cycle, and an emergency hot water tank replacement. All this action at my buy-and-hold properties was in direct contrast to a quiet and calm month with my new rent to own property.
The reason for the stark contrast here is that rent to own tenants are responsible for their own repairs and maintenance. This setup adds to the cash flow, but more importantly it also saves time and hassle for the investor. Rent to own prepares tenant-buyers for home ownership by having them take responsibility for their own maintenance and repairs. When their rent to own term is over and they take title, there won’t be a landlord to call when they clog their drains or their hot water heater starts leaking so it is important that they start learning to deal with every day problems just like a real homeowner.
Reason #2 – Tenant-buyers make improvements
Unlike buy-and-hold tenants who will call to have the landlord fix problems they may have caused themselves, tenant-buyers take responsibility to fix problems regardless of the cause and may even make improvements to the property. With our buy-and-hold properties we usually spend a couple thousand dollars to get the property “rent ready” but with rent to own the tenant-buyers take responsibility for the condition of the property from day one.
When putting together each rent to own deal, we make sure the tenant-buyer is present for the home inspection and ensure they come into the deal with “eyes wide open” being fully aware of any problems with the home (whether major or minor). If tenant-buyers want to address any of the deficiencies noted by the home inspector or make any improvements to the home, it is up to them to do so.
In my first couple months of owning rent to own property, my first tenant-buyer thought walk-in garage door was too flimsy to protect his tools and motorcycle so he decided to upgrade it to a steel door… at his own expense. For a regular buy-and-hold rental property this would seem strange, but with rent to own this type of “pride of ownership” is the norm. At the end of the day, the tenant-buyer is purchasing the home so they feel comfortable making it their own and have a real incentive to take great care of the property.
Reason #3 – Tenant-buyers want to pay (on time)!
As you can see by now, tenant-buyers have a different mindset than your average tenant. They are looking to be homeowners at the end of the day, and that means doing whatever it takes to complete the deal. Instead of rent being another annoying bill, it becomes a top priority for the tenant-buyer. And as the investor, that is good news.
Our option agreement stipulates that the tenant-buyer will only earn rent credits for each month the occupancy payment is received on time. If payment is late, no option credit is earned in that month. This simple term means tenant-buyers want to pay, and especially want to pay on time so they do not lose out on any monthly option credits which can amount to a few hundred dollars per month and really add up over time.
On the first rent to own deal I’ve been sharing details on throughout this post, the tenant-buyer even requested that we setup pre-authorized debits from his account to make sure his rent would always be received on time. Not having to chase cheques, wait for them to clear, or even make deposits is a huge win as a landlord so I was excited to work with the tenant-buyer to get this setup and now try to do it on every deal since it works so well for both parties.
Rent to Own is a Game Changer
The 3 real life examples I’ve shared above are a good sample of some key differences between rent to own and traditional buy-and-hold tenants. The bottom line is that while there is more work involved upfront to put together a rent to own deal, the ease of management and financial benefits justify the extra work in my opinion. Tenant-buyers enter the transaction with a much different mindset than regular tenants, and that is the game changer. When is the last time your buy-and-hold tenants took care of all of their own maintenance, made improvements to the property and requested to setup pre-authorized debit to ensure prompt payment of their rent?
Originally written for AndrewCMacDonald.com Blog: 3 Real Life Reasons I Love Rent to Own