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Should You Offer Rent-to-Own Options?

Model Houses Next to Stacks of CoinsOne way to invest in Kapolei rental real estate is to offer tenants a lease with a rent-to-own option. Rent-to-own agreements, also called lease options, are sometimes provided to help tenants purchase a home they might not otherwise qualify for. It is also one way for a property owner to sell off property without listing it with a real estate agent.

In some ways, giving your tenants the option to rent to own your rental property seems like a good deal for both sides. But, as in all things, there are benefits and risks for both parties involved. It is best to know as much as you can about rent-to-own agreements before you offer one to your tenants.

Benefits for Tenants

One of the obvious benefits for a tenant is that a rent-to-own agreement will allow them to apply their rental payments toward purchasing the home. Under such arrangements, the tenant is building equity in the property each time they make a rental payment. This could help them secure better financing terms once the time comes to qualify for a mortgage. At the same time, rent-to-own agreements do not require the tenant to buy the home, leaving them free to walk away from the deal at any time without a negative impact on their credit.

Benefits for Property Owners

Offering a rent-to-own option can also hold many benefits for property owners. This is especially true for those who have been trying to sell their property through conventional means with no success. Under many rent-to-own arrangements, the tenant is required to pay a large down payment to begin the option period. That can put a lump sum of cash directly into your pocket. Aside from that, you will continue to receive regular rental income, often at a higher rate than what your property would normally bring. Even if your tenant decides otherwise, most agreements allow the property owner to keep the option fee and the rental payments.

Risks for Tenants

Under a rent-to-own agreement, tenants also face some risks. The monthly payments under a rent-to-own option are usually higher than the average rent, which means a tenant may be strapped for cash down the road. Those payments, including the option fee, are forfeited in favor of the property owner if the tenant should decide to walk away from the deal. The cost of maintenance and repair on the property also falls on the tenant. This may be good for property owners but could add to the tenant’s financial burden.

Risks for Property Owners

There are a few ways that a rent-to-own agreement can hold risks for property owners, as well. Compared to a conventional sale, you will have to wait for many years to receive the full price for the property. Before that, you won’t have access to the money even if you need it. That can severely hamper your ability to invest in future properties or fund a retirement account.

Another possible risk arises if your tenant cannot secure financing at the end of the option period, even with the rent-to-own agreement. You could end up facing some difficult decisions regarding your property and the tenants occupying it.

Finally, suppose the market drops during the option period. Your tenant might change their mind about buying it for the price you have agreed upon, leaving you with a devalued property. Depending on how much the market drops, the option fee may not compensate for the lower price your property is likely to bring.

Clearly, offering your tenants a rent-to-own option is a big decision that needs careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Alliance (aka Honolulu). Our Kapolei property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 808-427-0611 or contact us online to learn more!

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