Downsides of Rent to Own And Why I Still Like It

[Wendell De Guzman]

Two days ago, I posted this on BP (raised some eyebrows as some skeptics didn't quite agree):

How to Make $50K on $150K Houses Without Stealing Them

In that post, I detailed why RENT TO OWN is, in my opinion, in my market (Chicagoland) at least, is the MOST PROFITABLE real estate strategy right now (Jan 2016). Where can you find a strategy where you can make $50K profit on $150K houses? However, as BPers and smart real estate investors know, there are always downsides to everything.

Here are the downsides to rent to own:

1. You have to wait more than 12 months to get the BIG BACK END profit and that is if the tenant/buyer successfully gets a bank loan.

This is why, every rent to own that I have - has to make me $400/month cashflow - minimum. Worst case scenario and the tenant/buyer does not qualify for a mortgage and you need to extend the lease and option period, it becomes a good rental property and the cashflow makes it worth while to hold.

2. You're still dealing with tenants and tenant issues.

Sure you are. But see this is the thing - real estate investors will have to learn how to own rental properties (because rehabbing and wholesaling only produce active income not passive income) anyway if they want PASSIVE, RECURRING INCOME (right @Brandon Turner - which by the way, I got his latest book and it's awesome). You might as well start with rent to own because it's less management intensive (since you have no maintenance & repairs calls), you get better quality tenants (since they put down $5K or more and hence, have more to lose if they decide not to pay the rent), and you accumulate that $5K reserve that you can use in case of vacancies.

3. Isn't Rent to Own affected by Dodd Frank?

If you do it the right way - which is separate the Lease & Option agreements - and no part of the rent goes towards the purchase (as that will be deemed owner financing) - then NO, Dodd Frank does not affect rent to own. Here's a good forum post about this topic:

Dodd Frank and Rent to Own

So how do you deal with all the downsides above:

1. Only get tenant/buyers who have a higher chance of getting a bank loan

On day 1, I have my mortgage broker talk with my tenant/buyers. Also, I don't get tenant/buyers with 380 credit score or those who just filed bankruptcy yesterday. I get someone with a 600 credit score or one who has filed bankruptcy 2-3 years ago (or longer). I get one who has a reasonable chance of getting a bank loan in 12-24 months and I get my mortgage broker help the tenant/buyer do so.

2. Tenant Prescreening

Rent to own does not mean you should not prescreen your tenants. You should. You should prescreen them for their ability and willingness to pay the rent. We do a criminal, credit and eviction checks. Having $5K - $10K is not a guarantee we will get you as a tenant/buyer. I even rejected one with $40K cash but the guy has 4 foreclosures in his name in the past 12 months. So, do a good job in tenant prescreening and you'll avoid 90% of problems with rental and rent to own properties.

3. Get an Attorney Who Knows Dodd Frank and Rent to Own

Get the right contracts and a knowledgeable attorney and rent to own will be an awesome exit strategy to add to your arsenal.

So...what other downsides did I miss? Any BPers succeeding with rent to own?