Rent To Own Real Estate Investing


Why Is Real Estate Considered To Be An Inflation Hedge

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Home prices tend to rise along with inflation. This is because homebuilders’ costs rise with inflation, which must be passed on to buyers of new homes. Existing homes, too, rise with inflation though. If you hold a fixed-rate mortgage, as inflation rises, your fixed monthly payments become effectively more affordable. Moreover, if you are a landlord, you can increase the rent to keep up with inflation.

Rental Housing Covered By The Eviction Moratorium

The temporary moratorium on eviction filings pertained to any rental housing that was one of the following:

  • Covered under section 41411 of the Violence Against Women Act of 1994
  • Covered by the rural housing voucher program under section 542 of the Housing Act of 1949
  • Had a federally backed mortgage or multifamily mortgage loan, like an FHA home loan

Get A Home Equity Loan

If you own a property with equity and have a good credit score, you can use that leverage in the propertys equity to get a home equity loan. A home equity loan is also known as a home equity line of credit .

This type of loan allows you to finance as much as 75% or 80% of your propertys equity. How much you can get is determined by a formal appraisal. For example, if you own a property worth $400,000 and you only owe $200,000, you can get finance of almost $150,000 to $160,000. You can easily buy a property with zero or no money down if you decide to leverage the equity to get a loan.

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First You Cant Always Do Rent To Owns

The market conditions have to be right. If you are in a very hot market, you will end up selling your property for quite a bit less than you could have made, had you sold it on the market normally. On the other hand, in a market that is flat or heading downwards, pricing a rent to own in a way that is fair to a tenant and that will still make you money is extremely difficult.

And, even if the market in your area is doing okay if the overall economic sentiment is poor, people will have a hard time believing the house will be worth the same as it is today, let alone slightly more when you sell it to them in 1, 2 or 3 years.

If rent to own is your only strategy in your business, what are you going to do when the market is not good for doing rent to own? And what are you going to do if your cash flow suddenly drops dramatically because of a market shift that makes new rent to owns difficult and existing ones fail?

What Are The Advantages Of Rent To Own Agreements

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Renting to own can allow a person to begin building equity in a home they like without having to take out a mortgage or come up with a large down payment. This can be especially beneficial for those without the financial means to make a down payment due to lack of savings or qualify for a mortgage due to low credit scores.

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S To Investing In Rent To Own Real Estate

In the few years that I have been taking on Rent to Own real estate investments, I have learned a lot. I suppose the thing that has become most clear for me is that, there is no hard and fast rule for ensuring your Rent to Own is successful. My best advice is, try and be as conservative as you can. Sometimes that means following your gut.

Get A Home Inspection

Have a home inspector check out the home before you agree to the purchase price, and ask the owner to pay for it. An inspector can identify any major flaws with a home that will be costly to repair later on, and also protect you against claims for damages if you dont buy, so this is an important step.

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Flipping To Make More Cash With Real Estate

Most people think they know what it takes to flip a house thanks to all the tv shows on the subject.

Ian Szabo, a guy who knows what it takes to make $50,000 $150,000 on a flip , author of From Renos to Riches, and creator of says he flips houses in two ways:

  • Buys a derelict house in a great area, fixes it up, and sells it for a juicy profit.
  • Buys a house that needs work, adds a legal suite, refinances to pull out all his money and some profit, and then rents it out to make cash flow.
  • Flipping is a high-risk strategy, however, and even Ian doesnt recommend anyone approach it without a back up strategy in place.

    With the right strategy, the right house and the right plan, most flippers starting out can make about $30,000 on a flip, according to Szabo. And thats about right! One of our VIP Coaching Clients just finished her first flip & made pretty close to that too.

    With that kind of profit potential, youd only need to do one or two a year to really fill in your cash today needs.

    The Power Of Leverage

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    With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. Leverage means to use debt to finance a larger purchase than you have the available cash for. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy orderunless you are buying on . And even then, the percentage you can borrow is still much less than with real estate, thanks to that magical financing method, the mortgage.

    Most conventional mortgages require a 20% down payment. However, depending on where you live, you might find a mortgage that requires as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, the size of your mortgage affects the amount of ownership you actually have in the property, but you control it the minute the papers are signed.

    This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage, or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value.

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    What Is The Rent To Own Real Estate Investing Strategy

    Nowadays, overpriced markets and neighborhoods make it challenging to purchase a property for ordinary folks without a whole bunch of cash in the bank. However, what many people dont know is that there is an option that allows the buyer to reserve a home and purchase it later once theyre ready. This is known as the rent to own real estate investing strategy.

    Most simply put, this strategy includes signing a contract with the seller that allows you to rent a property with the option to purchase it after the lease expires. This strategy favors the buyer because it gives them time to secure the finances needed for the property without losing out on a good opportunity.That way, if you cant afford the property right now because you cant qualify for a mortgage due to bad credit, you will have time to fix your credit and look into other financing options without worrying that someone else will snatch the property you set your eyes on.

    Expert Insight For Beginner Rental Property Investors

    MoneyGeek spoke with several financial experts on the best times to start managing rental properties and what beginner investors need to be successful.

  • In your experience, when is the best time in your life to start managing rental properties? And how many properties would you say investors should start with?
  • Are there factors and circumstances investors should be aware of? If so, how would they overcome those factors? What advice can you give beginner investors to be successful?
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    Four: Seek Legal Advice

    Before entering into a rent-to-own agreement, make sure you seek independent legal and financial advice, so that you don’t end up getting yourself into debt.

    Ask an independent solicitor to help draft a contract, and make sure that they include a clause that clearly outlines how much of your additional rent will go towards building equity in the home.

    If you’re a tradesperson, consider asking the home owner whether they’d reduce the rent in return for some minor home improvements.

    Cities And Counties Also Offer Help

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    Even in states without statewide assistance, many cities and counties have programs of their own. Check local and state government websites for information about coronavirus-related eviction moratoriums, rent forbearance, or rent assistance. For example, California’s moratorium will expire on September 30, 2021. New York City residents have until Jan. 15, 2022, before its eviction moratorium ends.

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    A Case Study For The Burl Rule

    I once knew a couple in San Francisco who decided to downsize once they realized that they could rent out their 2,600-square-foot, four-bedroom, three-bathroom home for $7,500 a month.

    Before the pandemic, they bought a second, smaller home in a less central location that cost 40% less than what they paid for the first house. Their new house had a mortgage of $3,000 and could have rented out for $4,500 a month.

    To them, a smaller house with a rental value of $4,500 was more aligned with their budget and household size. So they rented out their old house for $7,500 a month and boosted their monthly cash flow by at least $3,000.

    If you’ve owned for a while, it never hurts to do some research and see how much rent your home could command in the current market. You might be surprised. As of June 2022, the national median rent price has increased by 14.1%, according to data from Apartment List.

    And thanks to inflation, population growth and demographics, rent will likely continue to go up indefinitely.

    Consider Flipping Investment Properties

    This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV.

    There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do, says Meyer.

    His suggestion: Find an experienced partner. Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project, he says.

    The other risk of flipping is that the longer you hold the property, the less money you make because youre paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you dont mind a little dust.

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    Consider A Hard Money Loan

    Alternative financing commonly used is to get hard money. It should be used for properties that wont be approved for traditional financing. Investors can only get financing for a property up to a certain percentage of the propertys current market value. Sometimes, they can secure financing against the houses future value, like after repair value, which includes the cost to repair or renovate the property.

    Usually, a hard money loan is short term. It is generally given for a six-month to two years of period. But the drawback of a hard money loan is that it is offered at a very high interest rate. The interest rate tends to be 10% to 15% higher than the traditional mortgage. If you aim to purchase a property and sell it quickly or after renovating, buying it through a hard money loan is a great option.

    Get A Home Inspection & Appraisal

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    As with any home purchase, you should do your due diligence before you put pen to paper. An important part of this is having the home inspected. Hire a licensed home inspector to thoroughly evaluate the home and identify any issues. It can also be useful to have the home inspected for pests, radon, and other potential issues. Along the same lines, remember to run a title search to ensure there arent any liens on the house or unpaid taxes.

    According to Eugene Ladizinksy from Rollerup, it also doesnt hurt to have a second inspection done before you make the final purchase. If new issues have arisen with the home, you may be able to negotiate a lower purchase price.

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    What To Expect When Opting For Rent To Own Homes

    As for any real estate investing strategy, there are a few incentives and drawbacks to this kind of strategy:

    Advantages of rent to own homes

    • Handling the property as your own

    One of the best advantages of rent to own homes is having control over the investment property itself. You can assess the propertyâs needs and improvements needed prior to owning the property legally, which is an option many property buyers only wish to have.

    The tenantâs rent payments will go towards equity in the property which is the best method for real estate investing for beginners anyone could ask for. Building equity usually happens through a portion of the rent payments, typically $300-$400 a month.

    Related: What Is Equity in Real Estate?

    • The owner, aka the landlord, covers the taxes

    The landlord will pay the property taxes until you practice the option to buy, meaning that you wonât have to worry about taxes or any costs of the property until you buy the property.

    Related: All You Need to Know about Investment Property Tax Deductions.

    • The deposit is deducted from the total price of the property.

    The option deposit that the tenant pays in order to have the rent to own option is deductible from the total price of the property.

    Disadvantages of rent to own homes

    This is a pretty obvious disadvantage of rent to own homes as the rent tends to be of a certain percentage higher than regular rent. However, rental property financing can be a lot harder when compared with rent to own homes.

    Dont Just Gloss Over The Contract

    Read everything thoroughly, including deadlines and obligations. Learn about the option fee and rent payments, purchase price and how to exercise your intent to buy, as well as pet policies, maintenance details, property taxes and possible homeowners association fees. Make sure you know who is responsible for repairs and maintenance in some rent-to-own contracts, the renter may be responsible from the start of the rental agreement.

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    How A Lease Option Works

    A lease option gives a potential buyer more flexibility than a standard lease-purchase agreement, which requires the renter to buy the home when the lease ends. The price of the home is agreed to upfront by the buyer and the owner. The price is typically at the current market value of the home, allowing the renter to buy the home in the future at today’s price.

    For that option, the renter is usually charged an upfront fee by the owner, which might be 1% of the home’s sale price. The fee goes to the downpayment if the renter decides to buy the home at the end of the lease.

    The lease option is especially helpful to those who might be building their credit or don’t have enough saved for a downpayment. However, there are several features of lease options to consider.

    How To Avoid Paying Pmi

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    Say you are looking at a $200,000 home and you have $10,000 for the down payment. Most lenders will require a PMI payment if you do not put at least $40,000 down, excluding the lending fees. For many first-time homebuyers, a $40,000 down payment is out of the question.

    However, you can try to “piggyback” your loans so that two lenders take part in the loan. This could resemble an 80-15-5 type plan: you finance 80% on a primary mortgage, 15% on a second mortgage or home equity loan, and 5% as your down payment. By using the home-equity loan plus your down payment, you can leverage that amount against the purchase price of your home and cover the 20% down requirement, thus avoiding the PMI.

    The home equity or second loan will most likely have a variable rate or a rate higher than your primary mortgage, so you’ll need to keep an eye on this loan and try to pay it off first. Home equity loan interest is also deductible on federal taxes if the loan was used to buy, build or substantially improve a taxpayer’s home. However, a married couple is limited to deducting interest on up to $750,000 in total mortgage debt.

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