There is a myth circling around the real estate markets that rental properties are the last option when a house won’t sell. The idea that a rental property barely pays the bills, is a huge hassle, and will drain your resources is not always true. In fact, the opposite can be true.
When you correctly perform a Rent to Own deal, you stand to make a huge profit. Want to know the basics? At Strategic Real Estate Coach, we can help you through the deal so you learn how to make a substantial profit on your rental properties. We call it the Middle Man Income Strategy and it can work for you. Here is a brief overview:
- The most important step in making a profit on real estate is to buy the property, outright, for the lowest possible price. The renovations put into the property should be reasonable and pleasing to the general public. In other words, keep everything neutral and functional.
- Secondly, the paperwork you use in the transaction is critical. By utilizing a legally binding Letter of Intent (LOI) and Option Agreement contract, you are minimizing the risk considerably. When accepting a new rent to own tenant, the LOI is the first document executed and it outlines the terms of the purchase such as: the monthly rent, the deadline for obtaining financing, non-refundable option deposit amount, maintenance obligations, and any other detail you need to establish.
- After the LOI is signed, the option to purchase agreement is initiated and executed. At that point, they must meet the financing deadline or lose the option deposit. It is not uncommon for a tenant to back out of a rent to own situation for various reasons yet you do not lose any money. You have the legal right to their deposit and the monthly rent charged should leave you with a profit as well.
- After the tenant has expressed continued interest in obtaining financing, direct them to a mortgage broker you have used in the past. This simple guidance can give them the knowledge and drive to complete the rent to own contract.
In a rent to own situation, you have the ability to have continuous cash flow on a monthly basis from the rent alone but you can also collect the non-refundable option deposit from tenants wishing to make the purchase. Some properties have tenants back out every year and this can create an even greater cash flow for you. The tenant is responsible for maintenance and utilities, leaving you with little to no hassle from the property.
When a tenant is able to get the proper financing, you will contribute the option deposit as well as a set amount from the monthly rent towards their closing costs and fees. This can help them immensely and you are still able to cash out with a large profit margin. Upon purchase, you make money on the sale and because it was rent to own, the purchase price can be actual market price without concessions and other discounts.
It can be highly profitable to cash out on rental properties through rent to own transactions, when they are completed correctly. Don’t let a rental situation fool you into thinking you are losing money. Your rental property can be a “cash cow” for you if you know what you’re doing!