Investing in real estate has always been considered a wise financial decision. However, not everyone has all the money to buy a property outright especially when the current market value at any given time can be volatile depending on the state of the economy. This is where the concept of rent-to-own (RTO) properties comes in. In this article, we will be discussing what a rented property is, the advantages of investing all the extra money you earn into them, and the factors that need to be considered before you sign the lease-purchase contracts.
What is Rent-To-Own Property?
A rent-to-own property is a type of real estate agreement where a potential buyer will continue to pay rent for a leased property for a specific rental period, with the option to purchase the property at the end of the lease-purchase agreement.
There are two types of a lease contract:
- Lease option contractA standard lease option agreement is where you pay a monthly rental fee until you decide to buy the property. All the proceeds of your rent payments will go to your down payment. Fully purchasing the property is not the obligation of the buyer.
- Lease purchase contractThis is the more common among the two types. Also known as “lease to own”, this will require the buyer to purchase the property with a certain amount of interest which will depend on the home’s purchase price and property appreciation.
A rent-to-own contract typically has a lease period of two to five years, and during this time, the tenant is allowed to live in the same property and continue paying rent, which is usually higher than the market rate.
The tenant is also required to pay a non-refundable upfront fee called an option fee, which is typically between 1% to 5% of the property’s purchase price. This option fee serves as a down payment and is applied towards the initial purchase value of the property if the tenant decides to exercise their option to buy. At the end of the leasing period, the tenant has the option to purchase the property and receive immediate ownership at the agreed-upon sales price.
Advantages of Rent-To-Own Properties
There are several advantages to investing in a rent-to-own real estate property. Some of the most significant advantages include:
Lower upfront costs
One of the most significant advantages of rent-to-own contracts is that they require lower upfront costs compared to traditional home purchases. This is one of the best options for cash-strapped buyers. With a rent-to-own property, you only need to pay nonrefundable upfront fees and the first month’s rent, which is usually higher than the market rate. This means that you can move into a property without having to put down a large down payment.
Opportunity to improve credit score
Another advantage of a rent-to-own scheme is that they give tenants time to gain a good credit score. Low credit scores can be a significant barrier to traditional home purchases, as most lenders require a minimum credit score. If you’re looking for an affordable house, investing in an RTO will give you time to secure financing by applying for a home loan or increasing credit scores and working towards qualifying for a mortgage.
Property trial run
Rent-to-own contracts also give you the opportunity to test-run the property before you buy the property. This is particularly useful for those who are unsure about committing to a long-term purchase. By living in the property for a few years, tenants can conduct a thorough property inspection to get a feel for the neighborhood, the property’s condition, and any potential issues.
Fixed purchase price
Rent-to-own properties also offer the advantage of a fixed purchase price. This means that the purchase price of the property is agreed upon at the beginning of the rental agreement and will not change, even if the property’s value increases. This can be a significant advantage, as property values tend to appreciate over time from the purchase date, and a fixed purchase price can help tenants save money.
By having monthly payments, tenants of rent-to-own properties begin building equity in the property. This means that when they eventually purchase the property, they will have already invested a significant amount of money into it. This can make it easier to secure a mortgage and can also help tenants build their net worth.
Factors to Consider for an Aspiring Homeowner
While there are several advantages to investing in rent-to-own properties, there are also several factors that need to be considered before signing a standard lease agreement.
Initial premium payment
When considering a rent-to-own, it’s essential to evaluate the initial pricing of the property. It should be reasonable and comparable to other similar properties in the area. It’s also important to consider any potential changes to the property’s value over time, as well as any extra costs such as standard homeowner association fees and mortgage and property taxes.
Rent and option fee
The monthly rent payment and option fee should be considered. Monthly rent payments should be reasonable and comparable to other similar properties in the area. The option fee should be a fair percentage of the property’s value and should be clearly outlined in the contract.
Timeline of contract
The length of the contract should also be considered. Rent-to-own agreements typically last for two to five years, but this can vary. It’s important to consider the amount of time needed to improve credit scores, save for a down payment, and any other factors that may impact the ability to purchase the property.
The contract terms should always be carefully evaluated. It’s important to understand the terms and conditions of the agreement, including any penalties for late payments or failure to purchase the property at the end of the lease term. It’s also important to ensure that the contract terms are fair and reasonable. Failing to uphold the agreed-upon terms can result in legal action.
Finally, the condition of the property should be evaluated. It’s important to ensure that the property is in good condition and that any necessary maintenance and repair requirements are clearly outlined in the contract. It’s also important to ensure that the property is located in a desirable area and that any potential issues, such as noise or access to public transport, are carefully evaluated.
Looking to invest? Get in touch with us
A rent-to-own arrangement provides an opportunity for potential home buyers to occupy a property immediately while allowing them to secure the proper financials. However, not everyone is confident about dealing with a usual renting agreement. So make sure that you’re aware of what type of rent-to-own scheme you’re getting into. Even with the assistance of a real estate agent, it’s advisable to consult with real estate companies to ensure that you’re making the right investments in the right places.
Our goal at Asterra is to provide you with affordable real estate investment options. Whether it be for housing or a business opportunity, we can help you find the right spaces. Get in contact with us and connect with a real estate agent to begin the next step of your journey to investing in real estate.
Written by Renzo Guevara