You may have asked yourself “what is rent to own? I’ve heard about it, but I have no idea what it is.” Maybe you are in the market to sell an inherited property. Or, maybe you have terrible credit and are looking to buy a house. Whatever your situation, let’s get you filled in. Then you can confidently move forward with a fix for your problem.
What is Rent to Own for Investing? How to Make Amazing Passive Income
To begin, let’s get started with the most basic information: the definition. Rent-to-own is one way to explain the legal real estate arrangement called lease options. A lease option is when a someone takes over control of a property from a seller through a lease contract.
In this contract the new responsible party has the option to purchase the property. But, this happens at a predetermined point in the future, and at a predetermined price. The new person leasing the property is also able to exercise their right to sublease the property to someone else as a potential end buyer.
Different states call this different things. Some of the more common words used for this idea are lease options, seller financing (although this is often with a house that is owned free and clear by the seller), wrap around mortgage (used in Texas), etc. If you hear any of these kinds of terms, you are looking at a rent to own agreement.
Why Would Someone Use a Rent to Own Agreement?
There are TONS of reasons that a rent to own deal is the best option for people, whether sellers or tenant buyers. You never know what kind of a situation someone is in. You need to ask the questions to uncover their motivation to sell or why they might prefer a rent to own contract. So, don’t be shy.
Some of the most common situations I come across for sellers who would happily work with you to on a rent-to-own/lease option are:
- People who still owe money, but are just DONE with taking care of it.
- People who need to move quickly for whatever reason, but don’t want to deal with the headache of selling. They just want to know the payments will be made on time.
- People who inherited a property and who want a monthly income, but don’t want to take care of it at all.
- and on the list goes….
When it comes to the tenant buyers, there are also plenty of reasons that they would sign up for this agreement. The most common reason, though, is bad credit. In order to get a traditional mortgage a buyer usually needs to have pretty decent credit, but not everyone does.
A rent-to-own agreement can provide tenant buyers the chance to work towards owning a home, while also living in it for the time being. Not all rent-to-own agreements are created equal, though, so a tenant buyer will need to make sure that the agreement is also beneficial for their end goals, too.
Who Benefits from rent-to-own agreements?
The reason I love working with rent-to-own (lease options) is that it truly can be a triple win for everyone involved. The seller of the home benefits, the tenant buyer benefits, and the investor benefits. I call it a win-win-win situation.
Just check out the list of benefits for everyone!
Benefits for Sellers:
- Can move on quickly with their lives
- Are going to be paid a set amount of money every month (pre-determined in the contract with the investor)
- Don’t need to worry about budgeting for payments on an empty house (such as would happen if they needed to move while also working to sell the house)
- Helps them out of their property burden (maintenance, bills, management, etc.)
- Alleviates them of the work it takes to sell with an agent (marketing, fee to the agent, keeping the house clean and show ready)
- Helps them protect their credit (if they were to leave the house and stop paying, their credit would go south)
Benefits for Tenant Buyers:
- No credit pulling
- Get to live in a home that they are responsible for maintaining and can choose to purchase
- Opportunity to build credit while paying rent
- Helps them get a step forward in the home-owning process if the terms of the agreement allow their monthly rent to buy down their eventual purchase price
Benefits for Investors (you):
- No credit pulling
- Moves quickly without banks
- No money down
- Can take control of the property quickly and get a renter buyer/tenant buyer into the house immediately
- Can contract for 90 days before beginning payment in order to market the property well to get it renter out
- Explain to seller that you will NOT be living in the property, because you are not the final end buyer
- Can also negotiate with the seller some of the little maintenance costs (“lawn boy” and keeping utilities in their name)
Ultimately for the seller, the worst case scenario is the lease option, which comes with a whole host of benefits for them. The best case is that in the marketing process you, the investor, find an outright buyer for the property. No matter what, the seller wins, and you have helped them with their problem. Win-win.
Here’s a Quick Recap of the Full Process
Step 1: Focus on the seller
- Find a seller who needs to get rid of the property quickly
- Take over their payments in 90 days
- Credit works towards your balance over the course of the contracted time to pay for the house (10-15 years) (should be slowly reducing the amount you owe to buy)
Step 2: Find a Tenant Buyer
- Lives in the house 1-2 years while managing maintenance and repairs as needed
- Buy house at the end of the set term
- Establish $X up front cash as an option fee (5-10%); does NOT go towards the purchase price (non-refundable)
- They will pay monthly rent while working towards buying the property before the end of the term (non-refundable)
- Also might be reducing their total cost with each monthly payment (if they get to a closing for the property)
Step 3: Big Picture
- It’s truly a win for everyone
- Seller gets out of the property they didn’t want anyway
- Tenant buyer gets a home to live in and time to get their finances in order or credit in order to get the eventual mortgage
- You, the investor, get cash up front and ongoing monthly premiums on the property with minimal maintenance responsibility, plus a cash out at the end if the buyer does eventually close
Don’t Get Stuck Without the Proper Tools
Now that you know the answer to “what is rent to own,” don’t stop there. Keep getting educated on the process and the steps if you truly want to become a full-time investor. The benefits of this amazing arena is that you get your time back to you. And you have the chance to live the create the life you really want! And I want to help you to do it.
This is why I created my premier course, First Deal Done Fast. I LOVE seeing women thrive in this business and shatter the walls that hold them back. My course provides you with every step and tip along the way. It gets you from knowing nothing about investing in real estate to being the go-to person in your area.
The course is self-paced and comprehensive to make sure you can get all of the information you need to succeed. You will also be connected to an entire group of fellow investors. And they are going through the same process as you. I love seeing the community come together to support, encourage, and educate each other!
There is no place I love to be more than with this group.
Not only this, but you get access to my years of experience and knowledge as you go through the steps. I’ll be there to work with you through any issues that come up. I know you will love it, and can’t wait to hear how your life has changed! Click here to get started today.
What is Rent to Own? Now You Know.
Now you know all about rent-to-own, so the question is whether you or not you agree that it is a good fit for your goals. No matter what direction you choose to go, start moving in your goals with real estate investing. Your life with truly never be the same again. You got this.
What do you think is the best part about rent-to-own agreements? Comment below to share your thoughts.
Additional Resources You Might Like:
What is Rent-to-Own? Everything You Need to Know in One Blog
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