Rent-to-own property investment can be an effective strategy for beginner investors, and it can benefit both the investor and tenant involved. With rent-to-own, the tenant is given the opportunity to purchase the property over time. It all starts with a lease option contract, including an agreed sales price and length of lease term, which is usually 24 to 46 months.
The basic idea of this alternative way to invest is ideally to purchase a property for below market value and then rent it out to a tenant who has the intention of buying it at a later time. The tenant pays an option fee, which is often non-refundable and approximately 2 to 7% of the agreed purchase price of the property. Then, the tenant has the option to buy the property, while the property investor has an obligation to sell to the tenant within a period of time.
A low risk, lucrative way to earn a return
Rent-to-own can provide a lucrative return on investment for property investors; however, it’s not a viable strategy if you’re in a rush to make a profit or need to make money quickly. Rent-to-own property investments take time to bring forward a return, but it’s important to note that there are no guarantees of when you could earn a return.
This type of investment strategy is considered to be lower risk, but there are still some risks involved, including the possibility of missing out on better offers as the investor can’t put the property on the market throughout the lease term. And if the tenant doesn’t buy the property within the lease term, the investor will have to find another potential tenant or buyer.
There are numerous benefits to consider along with the potential to earn monthly income and capital appreciation when the property is sold to the tenant. In a contract for a rent-to-own property, the property investor can even negotiate that the tenant will be responsible for maintenance of the property and any necessary repairs, minimising operating costs for the investor.
When rent-to-own is most effective
This type of investment strategy works best when the buyer’s market is slow. Property investors can also utilise this form of investment when flipping a property and the market has dipped after completing the flip. When this happens property investors typically have the options of selling the property for a loss or holding onto the property until the market improves.
Rent-to-own can be an effective investment strategy to consider as challenging market conditions can lead to many buyers struggling to secure financing. And this can help the tenant get their foot on the property ladder, making it a win-win for the investor and tenant.
Through a rent-to-own strategy, a property investor can earn rental income and has the possibility to earn capital appreciation when the property is sold to the tenant. Even if the tenant doesn’t end up buying the property, the property investor could have earned more profit from having let it out than if they sold the property directly after completing the flip when the market was low.
Assess rent-to-own property investments
Rent-to-own property investments often start as a flip project, and it’s necessary to research the best way for you to add value to the property, in addition to a property you can earn a healthy monthly yield and capital appreciation on.
PropertyMenu’s deal calculator helps property investors make informed decisions on property investment deals. This brings transparency to the numbers behind these deals and gives investors the ability to weigh up the estimated costs and potential yields they could earn.
Solicitors can also be extremely helpful with rent-to-town property investments as their legal expertise is necessary in developing option agreements. If you’re interested in using rent-to-own as a property investment strategy, PropertyMenu can get you in contact with trusted solicitors who can help you develop an option agreement. Please contact us if you need any recommendations or tips.