It’s my opinion that in today’s market, landlords should be offering all their rentals as rent-to-own. In this deal structure, a tenant buys the right to purchase the landlords property, for a predetermined price and time frame, all while renting the house. It’s also called a lease option.
So what makes this deal structure attractive? First, you’ll get market- or above- rent rates. That’s because the number of people who want to own a home but can’t get financing is still high. Second, you’ll get thousands of dollars up front. Third, you’ll get higher-quality tenants -with a home owner’s mentality- that’ll take better care of your property.
From a landlord’s perspective, it just makes sense.
And just so you know, rent-to-own works well for mobile homes on land, too. We offer all of our land home deals as rent-to-own, but with a twist. We give tenants the opportunity to owner finance the property from us once they have satisfied their lease.
To explain it better, let me give you an example of a deal we just did.
We purchased a doublewide on a permanent foundation for $24,000. We turned around and offered it rent-to-own for $725 a month. We found some great people that paid us $4,000 as a non refundable option consideration for the right to purchase the house in a year.
Their option contract (the agreement that gives them the right to purchase the house) said that if they made on-time rental payments for a year, we would sell them the house for $90,000. At the end of the year, when they exercise their option, we’ll apply their non refundable option consideration to the sales price. They can then either get a bank loan, or make payments to us for 30 years.
Let me give you some pointers now that you’ve seen how it works in real life.
When we explain rent-to-own to our prospective tenants, we tell them that they’ll rent the home for a year. At the end of their lease, if they’ve made on-time rental payments for that entire year, we’ll roll the home into owner financing. In order to have that privilege, however, they must contribute some sort of money up front.
It took us a long time to figure out that wording, but it does a great job defining things so our prospective tenants can understand what’s going on.
Let me caution you on something. The money that a tenant contributes to you up front is not a down payment. This is important because you want to make dang sure it is clear you’re in a landlord tenant relationship until they exercise their option. Using the words “down payment” could infer that you’re financing it from day one and the tenants already have ownership in the property, which is not the case.
The money they’re giving you is called a non refundable option consideration.
To keep from saying during every phone call from prospective tenants, “A non refundable option consideration is the money paid to a party in order to purchase the right to buy a home for a specified price during a specified period,” we use the phrase “some sort of money up front.” It’s ambiguous yet descriptive enough to let non-real estate professionals know what’s going on.
(Notice we didn’t put an exact figure here. When tenants ask how much they need up front, we respond with, “It’s negotiable as long as it’s reasonable. What can you afford?” If you adopt this phrase, you’ll be pleasantly surprised at how much more people will offer you.)
We continue to use the phrase some “sort of money up front” until we have a promising applicant. Then we go into the particulars of what a non refundable option consideration is and how an option contract works.
To recap, getting better rents, money up front and great tenants makes rent-to-own a great strategy.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.