Deconstructing Rent To Own
Rent To Owns tend to become more popular in a
buyer’s market as sellers seek alternative ways
of selling their properties. However, sellers,
investors and tenants often make common, yet
predictable mistakes. Understanding what a rent
to own is, how it works, where it fails and how
to protect your self as a seller, an investor or
as a tenant, can make all the difference.
I have been involved with Rent To Owns as an
investor since 2003 when I started The Original
Rent To Own. Today, we continue to offer
investors complete turn key Rent To Owns from
tenant placement and screening, asset selection,
contracts, financing, due diligence, purchasing
and ongoing support and assistance including
closing the final sale. Our investors receive
passive investments backed by physical assets
with high rates of return. Over the past seven
years, I’ve heard and seen it all.
The “Rent To Own” is a layman’s term which
refers to a combination of a Lease Agreement
with an Option to Purchase Real Estate Contract.
Under the Lease Agreement the tenant is referred
to as a tenant where as in the Option contract
they are referred to as an Optionee. The tenant
occupies the home under a tenancy agreement for
a specified length of time ranging from six
months to five years with most completing in two
During this tenancy, the tenant has the Option
to buy the property as outlined in the Option
Contract even though they are not obligated to
do so. When the tenant is ready to buy the home,
they exercise their Option, pay out the balance
of the sale price, the title transfers and they
remain in the home.
When entering into the Option Contract, the
price or method of determining the future price
is established up front. The tenant typically
puts up a deposit which is often non- refundable
if they decide not to exercise their Option. If
they do exercise their Option within the
timeframe specified then the deposit is applied
towards their down payment.
There are no exact ways of setting up a Rent to
Own. One seller may inflate the total rent
amount and use a portion each month to build up
a credit for the tenant’s future down payment.
Others will charge regular rent with additional
payments on top of the rent. The additional
payment can be monthly and/or balloon payments
for those who may be on commission, receive
bonuses or tax refunds each year. Between the
initial deposit, monthly credits and/or balloon
payments, the plan is to have enough built up
towards a down payment for the tenant’s future
The main reason people buy a Rent To Own is
because they cannot qualify for their own
mortgage financing. Reasons include not enough
down payment, self employed income, cash
business, credit blemishes, no credit, short job
history, new residence to Canada, owning another
home that is not selling, and the like.
Sellers tend to be more open to selling this way
during a buyer’s market when sales are slow.
From a seller’s perspective, Rent to Owns can
solve double mortgage payments on vacant
property, deferring a large mortgage prepayment
penalty, using the rental income to qualify for
a new mortgage on another home or capturing a
higher price over a conventional sale.
When comparing the Rent To Own Strategy to a
traditional long term rental, sellers and
investors consider the following:
1. A long term lease eliminates vacancy,
advertising and turn over costs.
2. Property management is reduced as a higher
caliber of tenant interested in home ownership
is attracted to a Rent To Own.
3. Property maintenance to a certain dollar
amount is absorbed by the tenant thus reducing
nuisance calls and maintenance expenses.
4. A non-refundable deposit shows commitment and
provides the investor with a buffer.
5. Premium rent can be collected since the
investor is offering the tenant the opportunity
to own their own home.
6. Additional payments on top of the rent can be
collected each month therefore increasing cash
7. Defined exit strategy with a shorter
8. Pre-calculated profit from the beginning.
9. Higher cash flow with less variables.
10. Helping someone get into their own home.
Tenants benefit by having a clear plan towards
home ownership, minor renovations are acceptable
during the tenancy and they do not have to worry
about the landlord selling the property at an
inconvenient time during a tenancy.
The most common mistake I see home owners,
investors and tenants making is trying to save
money by not having a proper and enforceable
agreement in writing. A proper written Option to
Purchase Real Estate Contract outlines the
parties and the property, price(s), Option
timeline(s), consideration, credits, repairs,
renovations, terms, conditions, default,
jurisdiction, how the option is exercised, the
closing procedure, insurance, representation and
warranties, transferability and the like. It is
imperative to obtain professional accounting and
legal advice from those with experience in this
Another common mistake is that many home owners,
investors and tenants do not spend enough time
up front planning the eventual purchase or even
whether the tenant is even capable of purchasing
the property in the future. I’d recommend having
a mortgage broker pre-screen the tenant ahead of
time and assist with this step.
And finally, I see Rent to Owns fail when the
seller or investor does not have a back up plan
if the tenant decides to vacate. Consider if the
property is one that you can turn into a typical
rental. If so, will it cash flow as a typical
rental. Can you fix it up and flip it or can you
set up another Rent to Own?
As an investor, the Rent to Own strategy is one
of my personal favorites when executed properly.
The tenant is given the opportunity of home
ownership with a structured plan. The investor
makes a profit with less expenses, less
variables, predictable cash flow and a defined
exit plan, all while helping someone out.
Thoroughly research the Rent to Own strategy to
see if it’s right for you. Seek professional
advice, obtain proper training by someone who
has prior experience and ask for references. If
its right for you then get out there, help
others get into homes and get paid handsomely
for doing so. That is successful investing.