Real estate investing for beginners: All you need to know about lease to own homes.
We all know that investing in rental properties is a very lucrative stream. However, if we tell you that there is a more rewarding real estate investing strategy on the table, would you go for it? I hope you say yes because I would!
For this post, this strategy would be lease to own real estate investing. Here is what you need to know about it as a beginner real estate investor:
What are lease to own homes?
Simply, the lease/rent to own homes are those that come with the option to purchase. So, in other terms, it means that you rent out your property and over time your tenant has an option of either buying the property or moving out. Keeping in mind, that many investors use this strategy for buying an investment property with bad credit.
Related: Are Lease to Own Homes a Viable Real Estate Option?
How lease to own homes work
The concept of the lease to own homes is very simple. Thus, we’ll show it in simple steps:
- The seller and the buyer agree that the tenant (the aforementioned buyer) rents the property for a specific period of time. After that time passes, the tenant gets to choose whether to purchase the property or not. In the meanwhile, the tenant works out his/her credit score or financial situation for a down payment. This is also the reason why many real estate investors consider it a good method for rental property financing.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
- The tenant/ potential buyer pays option money. This money gives the choice of buying the property and it is not refundable. Usually, it is 2.5-7% of the property’s value.
- Both parties negotiate a price that would be stated in the contract. However, keep in mind it is usually higher than the market value at that time.
- Finally, pay attention to the wording. Some words determine whether the tenant is obligated to purchase at the end of the lease term. So, for that, make sure you talk to a real estate attorney.
How to market lease to own homes
Marketing your home for sale is a science. Moreover, the whole point of it is attracting clients, and in your case, a tenant. Therefore, you must understand one thing about lease to own homes: you are not looking for the typical tenant. Rather, you are looking for a tenant who is sick and tired of wasting money on rent payments. These are the ones who want to buy a home but there are financial obstacles in the way: 1) They might have bad credit, or 2) They might not qualify for a loan and therefore, they are looking for a more affordable option. Now that you know what type of tenants you are looking for, it is time to apply some psychology to your marketing strategy!
For marketing lease to own homes, you have two options: 1) You can list your property on a listing website and/or 2) You can put up signs all over your investment property. Psychology comes into the picture through the content of your signs or description (on the listing site). In fact, there are a few keywords that we figured would make a huge difference. Phrases such as “for sale”, “for rent”, “bad credit”, and “no qualifications” are very effective in attracting all kinds of tenants. The reason we say “all kinds of tenants” is because you want as many people to view your property as possible. After all, you get to choose your tenants, so no worries, no pressure.
Is an open house a good marketing strategy for lease to own homes?
Absolutely yes! Inviting a bunch of people to view your property is awesome. In reality, open houses provide maximum exposure for the property so your chances of renting/selling that house are higher. But, note, it does not have to be a whole event. Simply, after hanging these “for sale/rent” signs, just invite whoever calls you to the property at the same time on the same day. This way, you will also get a better feel for people who are sincere about renting and eventually buying the house. So, yeah, definitely go for it!
Tip: Make sure to be friendly!
Related: How to Organize the Best Real Estate Open House for Your Investment Properties for Sale
What are the pros and cons of investing in the lease to own homes?
No investment strategy is perfect. So, with that being said, here is the list of pros and cons of rent to own homes:
The pros of the lease to own homes:
Here are the reasons lease to own homes are the best for a new real estate investor:
- Sell faster: When renting your property with the option to purchase, you have a wider base of tenants who might be interested. This means that perhaps a few hundred people will contact you and you will definitely find one who is dead serious about it!
- Rental income: Renting your property with the option to buy will provide you with a rental income all the while you are moving towards selling the property. This also makes it one of the low risk investments in the business.
- Higher price: One of the factors that make it one of the best real estate investments is that as a property seller, you have the right to ask for a higher price. Why? Because your potential buyer is not buying in cash. Instead, they are building equity in the form of rental payments.
- No property management: For many real estate investors, property management is a nightmare. Let’s be honest, nobody wants to wake up in the middle of the night to a call from a tenant saying the faucet broke! So, in the lease to own homes option, you are free of the maintenance part. That’s because the tenant becomes responsible (as should be outlined in the contract).
The cons of the lease to own homes:
Here are the reasons why rent to own properties can be the worst for new real estate investors:
- Lack of certainty: This is the part where it gets stressful for real estate investors. It is not guaranteed that your tenant will proceed with the purchase. As a matter of fact, they might even choose to move out at the end of the lease term.
- You get paid in small payments: The worst thing about lease to own homes is that you do not receive the money in whole. The tenant will pay you in the form of rent payments. Once they decide they want to buy the property, a portion of the rental income adds up to their equity.
- Appreciation is out of the question: When you lease your property with the option to purchase, you set a price that is not negotiable after a while. Even though you get to set a minimum price, you are giving up the appreciation value over time. In some cases, the house would have appreciated very quickly and you would be better off selling it at once.
- Legal issues: Considering the fact that the lease to own contract is a rental one with the option to buy, many beginner real estate investor mess this whole thing up. It is preferable to have two contracts. The first is your typical lease contract. The second, on the other hand, states the option to buy. For this, you really want to consult with a lawyer.
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