How to Make Money on Rent-to-Own Homes
A rent-to-own situation occurs when a property owner rents out his house to tenants who plan to buy the home but are not in a position to do so immediately. Typically, the owner and renter agree on a price, and the renter pays an option fee at the beginning of the agreement to have first right to buy the house. The option fee is usually between 1 and 5 percent of the price, and is credited toward the purchase of the home if the renter buys it. The owner agrees to set aside a portion of the rent payment each month, such as $200, toward a down payment. This allows the renter to test-drive the house for a few years while accumulating a down payment by paying rent. Owners can make money on rent-to-own homes by locking in a fixed price, which is especially beneficial in a down market. Owners also keep the option fee and down payment money if the renter decides not to buy the house.
Instructions
- 1
Determine the value of your home with an appraisal. Compare this value to the amount you still owe to your lender. If you owe less than the value of the home and can sell for around the same amount as the appraisal, you can make money.
2Calculate a profitable monthly rent payment. Start with your monthly mortgage payment. You also need to account for other expenses, like HOA dues, regular maintenance, insurance and property taxes. Add up the total expenses for the year, including 12 mortgage payments, annual property taxes and estimated maintenance costs. Divide that number by 12, and you have your base monthly rental fee to break even.
3Determine how much you will set aside for a down payment for your renters, and add that number to your base break-even rental fee. For example, assume your break-even fee is $1,200 a month, based on mortgage payments, taxes and other expenses. If you plan to offer to set aside $200 a month for the renter toward a down payment, add $200 to that number to get $1,400. This is the minimum amount you should charge just to break even, including the down payment set-aside.
4Research the reasonable monthly rental price for your home. If you determine that you need at least $1,400 a month to break even and set money aside for the renter's down payment, and you find that most homes similar to yours are renting for $1,600, then you can advertise your rental house as a rent-to-own property for $1,600. You then make approximately $200 a month, and when you sell, you won't take a loss on the renter's down payment, since you added that cost to your break-even figure.
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