Modesto / Salida Single Family Rental Property Rent To Own

[Ruben A Ventocilla]

Hello everyone,

Just to provide some background, I have purchased a single family home in the city of Salida last month. A potential tenant was wondering if I would be open to do a lease with an option to purchase. The tenant is offering $2.5k per month for 24 months and then he wants to purchase the property for $500K afterwards. I purchased the house for 455K FHA and I am not sure if this potential transaction is worth it or not. Right of the top of my head, thinking about all the sellers costs and potential house appreciate I don't know if this would be a good option for me.

Any advice on what I should do in this situation is greatly appreciated.  

[Doug Pretorius]

@Ruben A Ventocilla Rent to own is a cash flow play for a seller in your position. You're potentially giving up some of the appreciation in exchange for an above market rent and a better quality tenant. I say potentially because they may not exercise the option in which case you get the best of both worlds.

In a typical RTO you would charge 5-10% of the purchase price upfront as non-refundable option consideration. Plus 10-25% above market rent. Plus 3-5% annual appreciation.

But it's all negotiable. The price doesn't have to be fixed either. It can be a formula. For example I've seen options written so that the purchase price is the appraised value at the time of exercise, or the appraised value minus 10% so the buyer can build equity. I've personally bought on an option where my purchase price was set to be the mortgage balance at the time of exercise so that I benefited from principal reduction.