Have you been trying to figure out how in the world a rent to own contract works? Well, you’re not alone, and I am here to help you out!
How Does a Rent to Own Contract Work for Real Estate Investing
Just a few weeks ago I had a lady tell me to give it to her straight. She has been looking into real estate investing for a while. For some reason, though, she had still not been able to figure how a rent to own contract would work in real estate investing.
Ya’ll, this is my bread and butter. This is the world I live in, so I was all too happy to get her the correct information to help her get on with her investing dreams!
Before we get too far into this, I want to make sure we are speaking the same language.
A rent to own contract is basically a lease option.
And a lease option is basically a rent to own. They are pretty much the same thing and can be called lots of different things. Some people have even confused it with owner financing.
Basically a rent to own contract is a deal with a seller where you, the buyer, are going to “rent to own” a property for a set amount of time (usually several years). You will be making the monthly payments (rent), and essentially be a glorified tenant for the seller. The difference, though, is that those payments will go towards the purchase of the property’s agreed-upon price.
Within the set amount of time, you also have the right to complete the purchase of the property in full. The seller cannot sell it to anybody else during that time because of the rent to own contract.
A rent to own contract is also an option that you can use to sell your own property.
You can offer a rent to own contract to a potential buyer instead of a normal sales option. In those situations, I will usually have much shorter time frames (just 1-2 years) before they need to close on the house or decide to forego the final purchase.
While those buyers are living in my property under a rent to own contract, they pay me every single month. During that time they are also building their credit, establishing their job history, and whatever else they need to do for their financial situation. Often these are really good people who just do not have the credit history or whatever is needed in order to get a mortgage. They just need a chance.
And, I love that I have the ability to help them out with rent to own contracts.
So, let’s wrap this into a nice little box. When I talk to a seller about a house I want to rent to own, I offer to take over their payments and close on the purchase price in 5 or 10 years. They won’t have to worry about anything because I will be responsible for the house along with the payments. And at the end of those 5 or 10 years, I will buy it and we will close on the deal officially at that time.
But then, when I sell the property, I tell my tenant buyers that they can have 1 or 2 years to buy the house while making their monthly payments in the meantime.
I also teach my tenant buyers that while they live there, they are considered the homeowners. So, if anything goes wrong in the house, it is their responsibility. My role is more like a “bank” for them, rather than a landlord. I train them that they are becoming a homeowner; when a homeowner has an issue with their house, they don’t call the bank.
It is my job to help them learn how to be a responsible homeowner.
Now let’s run some numbers so you can see this in action:
Let’s say that I am buying a house from a seller using owner financing. The purchase price for the house is $100,000 and my monthly mortgage payment to the seller will be $1000. Out of that monthly mortgage payment, I will be able to have 20% go towards my purchase price, which means that every year I will pay down what I owe by $2400. Finally, the length of our agreement is up to 10 years. At that time I must buy the house officially and pay whatever is due.
Now, when I sell this house to a tenant-buyer, let’s say their purchase price is $120,000. They pay me a $10,000 contract (or option) fee (of which $5000 pays towards their purchase price, and $5000 goes to me) and then pay $1200 each month. If they get a mortgage situated within that first year for the remaining $115,000, I will still owe $97,600 to my seller for the property. That means I will still make $18,000 on a backend payday for this property.
If I add all the amounts I have collected up I get:
$18,000 (backend payday) + $10,000 fee + $14,400 monthly payments = $42,400 on this property in my first year IF my first rent to own tenants buy it.
…Out of the 35 houses that I have bought and the 35-70 deals that I have done selling these houses, only ONE has purchased it in the first 15 months.
What typically happens is that the tenants get distracted and they leave. I get the house back, put it back on the market, someone else becomes the new tenant owner, and we do the whole thing again. So, that means that over the course of ten years I could have listed this same property for sale 10 different times if none of the tenant buyers decided to complete the purchase at the end of their contract. Yet, each of them still would have given me $10,000.
So, at the end of 10 years, I have $100,000 sitting in the bank (because I held onto that money instead of going to Vegas on it, right…). This means I can close on the remaining $74,000 I owe from my purchase price after continuing to make my monthly payments for the last decade.
I will still have a cool $26,000 leftover from all of the fees. Then, don’t forget, I also made $200 profit every month from my tenant buyers! Therefore, over the course of those ten years, which totals up to an additional $24,000. When we add up what is leftover from the fees to the monthly profits, we see that I made $50,000 on this property. And, I now own it free and clear. I estimate this property is now (after ten years) worth about $130,000!
Now, that is some math I can get behind.
For ten years I work as both the buyer and seller of the property. The whole time I controlled it entirely with the paperwork I have in place. After ten years I have a house for free that I can sell for $130,000. I was able to buy it without any of my own money, no effect on my credit (since I never dealt with a bank), and never had to deal with a real estate agent or anything.
I don’t know about you, but I’ll take as many $130,000 houses that I can get for FREE.
This kind of deal happens all the time. As of right now, I have about 6 houses that I own free and clear in my name. And, I never had to put any of my own money into them at all.
That is the beauty of creative financing and rent to own contract.
ALL of that money is mine. Not the bank’s, or the realtor’s, or anyone else’s. Mine.
These kinds of deals are great for a lot of different situations. So often when my tenant buyers tell me they can’t buy the house it is because life happened. Their plans changed. Sometimes a job is transferred to a new location, or a family member needs them to come live nearby for health reasons. And, seriously, these tenant-buyers apologize to me when this happens. Tell me that it does not show how great of an option this is for them.
Life happens, and rent to own really is such a great gift because of this.
If you are ready to make a change, grab my freebie to get you started right!
If you have read this far I can tell that you see the power here. Why not make sure you get my FREE info packet to start you out right and help you learn why this is totally the right fit for you? Click here to check it out!
The sky is the limit. What could you do with this world of creative financing, real estate investing, and (my favorite) rent to own contracts? What is getting in your way and why are you letting it hold you back? Today is the day to make a new choice and change your life forever. Get to it!