Rent-to-own is a form of creative investing, in that you get a property under market value and rent it to someone who intents to buy it before the end of the lease. In this, you get the option fee from the person living in there that’s about 3-5% of what the expected sale price of the home is. This fee gives the tenant to buy the property, but also gives you an obligation to sell it to the buyer. Now, when should you do this? well, you’re about to find out.
You should do it when the buyer’s market is slow. Buying and flipping is profitable when it’s a moving market, where it only takes a few months to do it. However, the market could dip, and it could end up being less than what you paid for, and the demand falls. You can either sell it, or hold onto it, but rent-to-own is another option as well.
If the market conditions worsen, usually people have time purchasing homes, especially when it comes to securing financing. This gives you a chance to strengthen the economic position to get a home, even when it’s bad. You can also make a profit here to lease the property to someone at a certain value whenever they’re ready to purchase, which might be months down the line. By setting it at the market value, you can get the benefits from it, and you could even set the cost higher.
Now, with rent to own, you want to do it if you want a larger ROI, but time isn’t of the essence. It’s a low-risk way to make extra money on a home that you flip. You are guaranteed to have the extra rental income for the lease, and get the ownership as well if the person doesn’t tend to buy the property.
However, by leasing it and giving the option to buy is good, since it gives the person a motivation to buy the property, and they will if it comes through. Even if they don’t, you get the option fee, and the rent money, and you can do this again. If the tenant does buy, you return the option fee, but you still get the rent money and the sale price of the place. You will make more money if they don’t buy, but both are profitable.
Now, when should you not do it? well you don’t when you need to make the money back fast. If you did get the funds through creative ways, you need to pay it back faster. While it might work well for flipping homes, it doesn’t work when it takes long to make an ROI, especially if you need to make it back quick. While the ROI is larger than the outright sale, it takes so much longer. Plus, there’s no guarantees that you’ll get your money back because they are unilateral, since there is the option to buy, and if they buy, you gotta sell.
You also shouldn’t do this when it’s a seller’s market. Though it might be difficult to determine the bubble, flips are super profitable near the top of it. So, don’t do a lease-option on a home that you flipped at the market when you’ll gain the most amount of money. If you’re able to make money on the home now, then you better be seeing it now.
Now if you do the lease-option on this during the top of the bubble, what happens? Well you risk the bubble popping and the value of the place dropping a whole lot. This drop will outweigh all of the profit that you could’ve made period in any circumstance. So, it totally screws you over.
With this, it’s a creative form of investment, but it’s a form of investment that takes time, effort, and you should try to make sure that if the market is right for this, and you don’t need something right away, then you can by all means do this. rent-to-own is an option, and if you’re in investing, you should consider all of them, this one being included, and if it works, then definitely try it.