You can call it rent to own, lease to own, lease options, or whatever you want. Regardless of the name, this strategy has been gaining popularity thanks to the many benefits of rent to own for everyone involved in the deal. There are two main ways of putting these deals together; the “tenant first” approach and the “property first” approach. There are many fans in each camp, and each of these methods of rent to own has its own pros and cons.
“Property First” Rent to Own
As suggested by the name, “property first” rent to own means you start out with a property and then find a tenant-buyer for that property. If you already have a single family rental property and are looking for an exit strategy or a way to boost your cash flow this can be a great strategy. Alternatively, if you are able to get great deals on properties or purchase homes below market value, this method of rent to own investing could work well for you.
With this strategy, a specific property is marketed as a rent to own home and the owner or property manager will usually do showings, take applications, and filter prospects similar to the usual tenant selection process. Even with a highly desirable property, sorting through a large number of applicants is usually required to find the right tenant-buyer for the property. A key point here is that the property is usually available and your tenant-buyers can get into their new house as soon as the paperwork is complete.
“Tenant First” Rent to Own
Again, as suggested by the name, the first step in the “tenant first” rent to own strategy is to find a qualified tenant-buyer who will rent to own a property and intends to purchase it and take title the end of the rent to own term. Now, easier said than done, and this process takes a LOT of filtering to find qualified applicants with realistic expectations.
Once a suitable tenant-buyer has been located, a Realtor works with them to find a property to meet their criteria and pre-determined budget.
Once the tenant-buyer has found a property of their choice that fits within their budget, the investor can either close themselves or bring in another investor as a money partner to fund the deal.
Advantages and Disadvantages
Personally, I tend to prefer the tenant first strategy, but each investor has their own experience and opinion on the topic. The truth is, there is no right or wrong way to do it as long as you setup the deal so everyone wins. Some of the things I like about tenant first rent to own are:
- Filter tenants first to avoid working with tire kickers
- Tenants select their own home to suit their criteria
- Can have tenants take on more upfront expenses (eg. home inspection)
- No vacancy period since tenants take occupancy upon closing
Flipping to the other side of the coin, property first rent to own has a few benefits as well:
- Easier to purchase below market value
- Focus on specific locations and property types you like best
- Tenants can move in immediately
If you have a large list of tenant-buyers in a specific area, property first can work very well. The main risk I see with this strategy is having the property sitting vacant waiting for the right tenant-buyer to like that specific property.
As a conservative and risk adverse sort of guy, the certainty of the tenant first strategy really clicks for me. But, to each their own.
What is Your Rent To Own Strategy of Choice?
I’m curious to hear what you like best. Leave a comment below and let us know: “Do you prefer tenant first or property first rent to own, and why?