Did you know more American households are renting now than they have in the past 50 years? The competitive pandemic housing market, combined with the lingering effects of the housing crisis, has discouraged potential owners.
Rent-to-own real estate is a way to invest in real estate that is an alternative to the traditional real estate investing process.
In rent-to-own contracts, the home buyer and seller agree upon a future purchase price for the home. A portion of the buyer’s rent payments goes toward the purchase price of the home.
If you are interested in owning real estate, renting to own is a great option that benefits both prospective buyers and sellers. Keep reading to learn essential facts about the rent-to-own real estate investing process.
1. What Are the Benefits of Rent-To-Own Real Estate?
The traditional process of purchasing a home is plagued with obstacles. You’re pretty much shut out of the game if you don’t have a good credit score and the money for a down payment.
As a buyer, there are many advantages to renting to own than you may realize.
When you rent a home, you have no ability to build equity the way you would as a homeowner. When you rent-to-own, a portion of the rent you pay goes toward the purchase of the home, allowing you to build equity.
Try Before You Buy
Another benefit of rent-to-own real estate is getting the opportunity to live in the home before making the commitment to purchase it. This applies to real estate-owned (REO) properties as well.
Living in the home before agreeing to purchase means you get to see what life would be like there. You can find out firsthand what the neighborhood is like and what issues there are with the home.
Locked-In Purchase Price
With home prices rising all over the country, locking in a future purchase price can be extremely beneficial. Rent-to-own real estate provides just such an opportunity.
As a buyer, you have the option to back out of the agreement if housing prices fall. However, this may or may not be the best decision depending on how much you have already paid into the contract.
Is bad credit preventing you from getting a mortgage loan? That won’t be a problem if you decide to pursue rent-to-own real estate.
When you rent-to-own, you can start the home buying process by rebuilding your credit score. That way, when it comes time to buy the home, you’ll be in a much better position to qualify for a loan.
2. What Are the Risks of Renting to Own?
As with any type of real estate investing, renting to own comes with risks as well as benefits.
For example, rent-to-own gives you the time to improve a bad credit score. However, if the time comes to buy the home and your credit score has not increased, you could lose the opportunity to buy and the years of rent paid.
There is also the risk that you could run into unforeseen financial difficulty at some point during the course of renting to own. You might lose your job or suffer a severe illness that may affect your options.
Finally, it is important to be aware of shady landlords. You could enter into an agreement that the landlord doesn’t honor. It’s always a good idea to have a lawyer go over a rent-to-own contract before signing.
3. Who Is Responsible for Maintenance, Taxes, and HOA Fees?
When you create a rent-to-own contract, it is important to include delegation of responsibility when it comes to home maintenance and upkeep. These can be the responsibility of the buyer or seller.
In some cases, property managers are responsible for handling repairs and maintenance. However, you need to be clear on who is financially responsible before signing a contract. These costs can be quite high.
If the home is part of an HOA, it is also important to negotiate whether the buyer or seller is responsible for paying the HOA fees.
Is Rent-To-Own Real Estate Right For You?
If you don’t qualify for a traditional mortgage, rent-to-own real estate is a great way to pursue owning real estate. Rent-to-own provides opportunities to build equity, lock in a purchase price, and rebuild credit.
To read more great articles like this, check out the rest of our Real Estate section.