Real Estate Investing Guide: The Rent to Own Strategy Explained

One of the most common reasons why people give up on their dream of owning real estate is because they are not financially capable of buying a real estate property. If you’re hesitant about taking that first step because of finances, don’t worry, you’re not the only one. However, there are ways to invest in real estate assets without having the cash for it right now. 

What is the Rent to Own Real Estate Investing Strategy

Nowadays, overpriced markets and neighborhoods make it challenging to purchase a property for ordinary folks without a whole bunch of cash in the bank. However, what many people don’t know is that there is an option that allows the buyer to “reserve” a home and purchase it later once they’re ready. This is known as the rent to own real estate investing strategy.

Most simply put, this strategy includes signing a contract with the seller that allows you to rent a property with the option to purchase it after the lease expires. This strategy favors the buyer because it gives them time to secure the finances needed for the property without losing out on a good opportunity.
That way, if you can’t afford the property right now because you can’t qualify for a mortgage due to bad credit, you will have time to fix your credit and look into other financing options without worrying that someone else will snatch the property you set your eyes on.

What to Consider Before Diving into the Rent to Own Real Estate Investment Strategy

As with any strategy, there are always going to be pros and cons involved. In this case, one thing you must keep in mind is that most rent to own real estate investing agreements contain a specific clause that requires the buyer to pay the seller a one-time fee that is non-refundable. This is sort of like a guarantee for the seller that the buyer is serious about their intention to eventually purchase the property. 

This “security deposit” is called the option money and it is a compensation for the seller who will be taking the property off the market in favor of the buyer. The amount of the deposit ranges between 2% and 7% of the total purchase price. 

Moreover, the rent to own house agreements often contain some very delicate wording that you must be able to understand to the core. Otherwise, you might end up obligated to purchase the property once the lease period ends without even being aware of what you’re getting yourself into. That is why I recommend working with a real estate lawyer to help you understand and break down these agreements.

Another thing to keep in mind is that the rent to own strategy can be risky for both parties. In one scenario, the seller might end up losing out because the property grows in value yet the buyer is still going to pay the set amount determined in the initial contract. On the other hand, if the buyer is unable to purchase the property after the lease period ends, they will lose the deposit they provided at the very beginning.

With that said, the rent to own strategy risks can really go both ways. This strategy favors buyers far more because it allows them to lock down a set purchase price at the beginning of the contract, meaning they will still be paying that same amount even if the property triples in value over time. This is bad news for the seller, although in many cases the difference between the old and new value is not that significant.

The Rent to Own Real Estate Investing Strategy Goes Both Ways

The great thing about the rent to own strategy is that you can find yourself at any end of this deal. If you’re currently not able to finance a property for any reason, this strategy will allow you to lock down the property you want and get some extra time to handle the finances. On the other hand, you can also leverage the rent to own strategy as an investor. 

If you purchase an investment property, you can consider renting it for a couple of years with an optional purchase clause in the agreement. However, make sure you fully understand what the pros and cons of this strategy are before you dive any deeper into it. Once you put the property off market for a potential buyer, its growth in value will no longer be relevant, meaning you could lose a couple thousand dollars along the way. 

However, the positive side is that you would get extra security knowing that the property will eventually be sold and that your return on investment will be made.