The Rent to Own System of real estate investing is by far better than the out of date Buy-Hold-Rent method.
Some of you may not have heard of the Rent to Own method before. That is okay. Here is an explanation:
A real estate investor has a rental property that they would like to rent out. They find a tenant who would like to rent the home, with the option to purchase it down the road. (In this scenario, we are going to refer to the tenant as the tenant/buyer). An agreement is established between the investor and the tenant/buyer. Contained in this agreement are a number of things. First, in order for the tenant/buyer to rent the home from the investor, they have to provide a down payment to the investor. This down payment that is provided will be used toward the future purchase of the home by the tenant/buyer. Second, the tenant/buyer agrees to pay the investor their standard monthly rent. In addition to the monthly rent, there is a premium that the tenant/buyer pays over and above their monthly rent to the investor. This monthly premium is credited to the tenant/buyer’s down payment and factored into the final sale price at the time of the purchase. Also, the final sale price of the home is usually established on day one by the investor. The final sale price of the home can be the market value of the property at the time of sale, or there can be a fixed appreciation model in place. For example, if the term of the Rent to Own agreement is 3 years. It can be pre-determined that the property will appreciate in value the first year by 4%, the second year by 5%, and the 3rd year by 5%. Usually, Rent to Own Terms are established for 2 or 3 years. After this term has been completed, the tenant/buyer has the right to exercise their option and purchase the property.
The benefits of the Rent to Own system to the tenant/buyer are plentiful. In my opinion the most important benefit is that the tenant/buyer is able to realize home ownership sooner rather than later. They are able to realize homeownership sooner because the ideal Rent to Own candidate has sufficient income in order to qualify for a mortgage, however their credit may be slightly bruised, and in need of some repair and attention. The tenant/buyer works with the investor over the course of the Rent to Own term, in order to repair their credit, so that they are able to purchase the home at the end of their Rent to Own term.
The benefits of the Rent to Own method to the investor are equally as plentiful. In my opinion, a couple of significant benefits are, 1) the increased monthly cash flow, and 2) significantly reduced repairs and maintenance required on the property.
This is an area where The Rent to Own and Buy-Hold-Strategy differ quite substantially. With the Rent to Own arrangement, the tenant/buyer is often times responsible for all repairs and maintenance on the property. In addition, Rent to Own tenant/buyers generally speaking have a high degree of pride of ownership. With this increased pride of ownership, properties are often treated better by the tenant/buyers, and they are not treated the same way as a straight rental unit.
So why is the Rent to Own Method better than the Buy-Hold-Rent strategy?
Two reasons.
1) As the real estate investor (which you are), you are (or should be) concerned with the cash flow of your investment property. The more cash flow that can be generated by a property, the better.
2) You do not have any repairs and maintenance to worry about. This point should not be underestimated, as many beginning investors are terrified of being a Landlord, and they are terrified of the duties and responsibilities that come along with this new role.
In addition, the Buy-Hold-Rent method of investing is less favourable than the Rent to Own Strategy, due to a number of reasons.
1) You are responsible for repairs and maintenance. No matter if the property is brand new, or many years old, there are repairs and maintenance issues that come up on all properties. If you are not a handy person yourself, then you should be delegating this work out to qualified handymen. This comes with an addition cost though.
2) Not as good cash flow is another reason whey the Buy-Hold-Rent method is less favourable than Rent to Own. Often times with these properties, your profit margins can be thin. Any unexpected repair or maintenance issue that you have to have completed can potentially wipe out your positive cash flow for the month, or even for the entire year.
The Rent to Own Method is gaining more popularity and support among real estate investors due to the clear advantages over the outdated buy-hold-rent strategy.
