Tenant First Rent-to-Own Deals – Means that you qualify the tenant and then find a property based on your criteria and what the tenant could potentially qualify for in the future.
Property First – Means that you find the property that meets your investing criteria, purchase it, and then find a potential tenant-buyer through marketing and advertising.
If you are just starting out with rent to owns I suggest that you purchase and read these two books:
Benefits Associated with the Property
- Easy for New Investors to Quickly Generate Profit From The Property – Good for Sales for Realtors
- Turn Cash Flow Negative or Tight Cash Flow Properties INto Positive Cash Flow Properties
- Tenants Invested in Home Take Care of Home – Less Time on Maintenance
- No Realtor Fees on Sale of Property
Downsides Associated with the Property
- When Sold Often Taxed as Income (Need to Have Better Right Tax Structure)
- Must Find New Properties When Properties Are Sold – Keep Working at the New Prices
- If Property Appreciates More than Agreed Upon in Option Agreement and Sold (Hot Market)
- If Property Depreciates in Value than AgreedUpon in Option Agreement Tenant Cannot Buy It and Does Not Cash Flow (Down-Turn in the Market)
- If Tenant Cannot Buy May Not Want to Leave with Money Invested in the Property
Things to Think About
If done well and setup with the right tenant-buyer this can be a great way to exit a property and generate positive cash flow from a property that would be too tight otherwise. The problem is that too many investors use this strategy to put any tenant that has money into a property, with the knowledge and the forsight that the tenant-buyer will never be able to purchase the property. To me this gives all real estate investors a bad name. When a tenant-buyer invests that much time and money into a property they are less likely to just leave.
By having a property with higher rents and a lease agreement in place you would potentially be able to increase the DCR of the property, as you would be receiving more funds each month, and qualify more easily for mortgages.
Investing in Rent-to-Own Property: A Complete Guide for Canadian Real Estate Investors by Mark Loeffler
The 7-Step Lease Option Refinance Strategy: How to Profit in Real Estate with Minimal Risk by David Hamilton