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Understanding the Concept of Renting to Own a Home

A Rent-to-Own Home contract (also known as Lease-to-Own Home) is a type of housing arrangement that combines traditional renting with home ownership. This concept is becoming increasingly popular as it offers several benefits to both tenants and landlords.

How does Rent-to-Own work?

With a Rent-to-Own Home, the tenant rents the property for a specified period, usually one to three years, with the option to purchase the property at the end of the lease period. The tenant pays a monthly rent that is typically higher than the market rent for the area, with a portion of the monthly rent being credited towards the purchase price of the property. At the end of the lease period, the tenant has the option to purchase the property or move out and find another property.

The purchase price of the property is determined at the start of the lease period and is usually higher than the market value to account for the benefit of having the option to purchase. The tenant and the landlord sign a contract that outlines the terms and conditions of the rent-to-own arrangement, including the monthly rent, lease period, and the purchase price.

Benefits for Tenants of Rent-to-Own Homes

Flexibility: Rent-to-Own Homes offer tenants the flexibility to move in immediately and start building equity, without having to make a large down payment. This can be particularly beneficial for individuals who have been unable to save a significant sum of money. It can be a cost-effective method to enter the property market.

Time to Improve Credit Rating: Tenants have the opportunity to improve their credit score during the lease period, making them more eligible for a mortgage when it comes time to purchase the property. This is useful for those who are in the process of improving their financial situation, with a view to become homeowners in the future.

Testing the Waters: A Rent-to-Own Home offers tenants the chance to test out the property and the neighborhood, before committing to a long-term mortgage. This can be especially helpful for persons who are unsure about the area or who want to make sure that the property is a good fit for their needs.

Building Equity: Tenants have the opportunity to start building equity in the property from day one, as part of their monthly rent is credited towards the purchase price of the property. Hence, they get the opportunity to invest in real estate and start building wealth.

Benefits for Landlords of Rent-to-Own

Guaranteed Rent: Landlords are guaranteed a steady stream of rental income, with no vacancy losses, during the period of the lease.

Potential for Increased Profit: The property-owner has the opportunity to sell the property for a higher price than the current market value, to account for granting an option to purchase the property at a future date.

Drawbacks of Rent-to-Own Agreements

As with any contract there are some potential drawbacks. The main ones are:

Higher Monthly Rent: Tenants are required to pay a higher monthly rent, which can be a burden if they are unable to purchase the property at the end of the lease period.

Risk of Foreclosure: Tenants may be at risk of losing the property if they are unable to make their monthly rent payments or if they are unable to secure a mortgage or other funds to purchase the property.

Complex Contracts: Rent-to-Own Home contracts can be complex, making it important for both the tenant and the landlord to fully understand their rights and obligations before entering into the agreement. Before signing a contract, the tenant should have a clear understanding of their financial situation and their ability to ultimately secure a mortgage and complete the purchase of the property.

Summary

Overall, Rent-to-Own Homes offer a unique opportunity for individuals who are unable to save for a substantial down payment or who are working to improve their credit score. It provides a way for tenants to build equity and eventually become homeowners, while also offering landlords a guaranteed stream of rental income and the potential for increased profit.

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