If you’re a landlord considering entering the rent-to-own market, it always helps to appraise the pros and cons. Arguably, this is an excellent way to guarantee a stable rental income, but the scheme doesn’t come without disadvantages. After weighing the good and the bad points, you can decide whether it’s right for you.
Pros of Offering Rent-to-Own Agreements
You can secure a steady rental income for a few years
Tenants who enter a rent-to-own agreement tie themselves into an above-market rate for a few years. At the end of the agreement, they’ll decide whether to buy the property or not. As their landlord, if they don’t choose to buy the property you can decide whether to continue renting it out to them on a month-to-month basis.
The biggest benefit of this is that you secure your rental income for a few years. When you don’t have to seek new tenants periodically, you don’t risk losing money during the periods where nobody occupies your property. In addition to the guaranteed income, this also means you’re closer to securing a profit on a sale than if you leave the property sitting on the market unoccupied. As an added bonus, if you want to jump straight into a similar agreement if the tenants don’t meet your needs, you can do it. As a landlord, this type of agreement provides both financial stability and flexibility.
You may find that you’re in demand
With mortgages still attracting strict lending criteria, many Millennial and self-employed families find themselves priced out of the housing market. As they have no desire to remain as renters forever, they look toward alternative options that are plausible despite their less-than-ideal credit profiles. If you’re offering a rent-to-own agreement as a landlord, you may find that your property is in demand.
If your property is in demand, you may also have more latitude when it comes to the sale price. Those who are keen to jump into the property market may be more open to spending just above market value than those who have an easy time acquiring a mortgage. The high-demand nature of your property also means you’ll have a better selection of tenants to choose from.
Cons of Offering Rent-to-Own Agreements
You’re locking yourself into an agreement
One of the undeniable pitfalls of being a rent-to-own landlord is that you’re locking yourself into an agreement. At the minimum, this means six months, but it could mean up to five years. While it can mean enjoying a consistent rental income it also means you’ll have a harder time removing the tenant if they default on their agreement.
Similarly, you may struggle to increase the rental price in line with market changes if all of the sudden your area becomes hot. And, if you find you want to sell the property earlier than expected you won’t be able to due to your contractual obligations.
You won’t make as much money from the property in the short term
If you’re fixing and flipping a property with the intention of making money quickly, rent-to-own probably isn’t for you. In the short term, you’ll make money from being a landlord, but the profits aren’t as immediate or as significant as when you sell a property soon after renovating it. As there is no guarantee that the people you’re renting the property out to will purchase it, you may find that this is a slow route toward making a profit.
The Bottom Line
When it comes to being a rent-to-own landlord, weighing up the financial pros and cons is essential. While you’re more likely to enjoy a steady rental income, you won’t access cash as quickly. Although maintaining a steady tenant relationship is possible, that same stability means locking yourself into a tight contract. With a little careful planning, you can decide whether this route is right for you.