Rent To Own
Let’s say you’re a buyer that is saving for your first home. Though some down payments can be as little as 3%, even that can feel like a huge hurdle when you’re just getting started. One option to consider is a rent-to-own.
This contract you sign with a landlord/owner will indicate your rental payment, whether any of that payment will go towards your down payment, and of course, the purchase price of the house at the end of the lease.
Now, it’s important to understand that there are two types of rent-to-own contracts:
1) Lease option contract - this would be renting the home with an option to buy within the dates - and the price - as noted in the contract. Here you would not need a pre-approval letter from a lender, as the purchase is only an option, however, getting one can help you with negotiations on the terms, while understanding your buying power.
2) Lease purchase contract - this means you will rent the home and usually buy it within the dates, for the price as stated in the contract. In this case you should get pre-approved by a lender.
One benefit to rent-to-own is you can often word the contracts to apply a portion of your rent towards your purchase downpayment. Typically you are signing a lease for a bit higher than market rents to achieve this, so let’s look at an example:
Pretend you sign a 3-year lease for $1200/month, with 25% each month applied towards your downpayment. At the end of 3 years, you can expect $10,800 to apply to your downpayment.
At the end of the lease, when you’re ready to buy, you would obtain your loan as you would with any purchase, and complete the transaction like a standard purchase.
Rent-to-own works well for would-be-buyers to move into their dream house right away, and give them years to improve their credit scores, while continuing to save up for the downpayment.
If you’re looking to learn more about real estate investing strategies like this, don’t hesitate to get in touch by following me @joesteelerealestate across all platforms. Prefer a video version of this blog? Please watch below and subscribe for more content like this!