What Is Rent to Own?
What is Rent-to-Own?
Rent-to-own in simple terms means renting a property with the intention of purchasing it someday. It entails paying a percentage of the property’s price alongside the normal rent which then serves as a down payment on the property. This will enable the tenant-buyer to purchase the property before or at the end of your lease, provided they are eligible for a mortgage.
In this post, you will get a better understanding of what rent-to-own is and how it works.
How It Works
The tenant-buyer and landlord-seller sign two agreements: one is a lease, and the other is an option to purchase the property. The content of the lease-purchase agreement isn’t standard, so it can be negotiated between the tenant-buyer and landlord-seller to suit both parties. It contains the following aspects;
- The purchase price is the property’s actual price. Before signing the lease-purchase agreement, the purchase price is decided
- The option fee is a non-refundable sum paid to the landlord-seller and is a percentage of the purchase price. Even if the tenant-buyer does not purchase the home at the end of the lease period, they will not get this fee back
- The amount paid as monthly rent
- The term of the option will be agreed upon by both parties i.e. the tenant-buyer will have a time frame in which they can execute the option, by the end of which they are expected to buy the property.
Property purchase price: $250,000 (price is locked in – even if the house value appreciates during the option period)
Down Payment: $25,000 (10%)
Market rent: $2,000
Term: 2 years
During these 2 years of paying $2,000 rent, the tenant-buyer will have the time to fix their credit, save for a down payment, or fix their Debt-To-Income ratio so that they can qualify for a traditional bank loan. By this point, they have already paid 10%, which the bank considers as part of the down payment on the property. Banks usually ask for 20%, so the buyer then needs to come up with the remaining 10% in order to fully own the property.
Rent-to-own provides a viable solution for people who are tired of being tenants and want to live in their forever homes but are in the process of improving their financial situations. It also locks in the price of the property, giving assurance that costs will be the same at the end of the option period as they are today.
At Cedar Investing LLC, we have many properties which we sell using a rent-to-own model, and we provide necessary guidance from the start to the end of your process. We’ll clarify your doubts on any aspect and help you decide on whether or not a particular deal will be profitable for you in the long run. In addition, we will help you qualify for a mortgage you can afford by the end of your lease through detailed advice on debt relief and building good credit.