Many commercial property investors buy real estate in Detroit for the purpose of renting it out in the future. This is a surefire way to generate long-term income, but it is not the only setup to keep in mind. Another alternative to traditional leasing is a rent-to-own setup, where you act as a bank offering a loan to your tenant for your property. Is the commercial rent-to-own market right for you? Let’s do a little digging to find out.
Types Of Rent To Own Setups
There are several ways you can set up a rent to own contract with a tenant, and each option could lead to more money for you in the long run. Examples include:
- Interest Based Loans: You charge the tenant interest on the purchase of your property and break the loan down into monthly payments.
- Fixed Price Loans: You charge a fixed price for rent every month where a portion goes to principle and another goes to your pocket.
- Lease Purchases: You charge monthly rent as normal, but only a small portion of the tenant’s rent goes to the principle of the property for 2-3 years. This amount is usually less than 10%. The tenant has the exclusive right to purchase the property during that time. If he does not do that, you have the right to sell it without any refunds.
All of these setups will usually involve a down payment in the neighborhood of 3% to 15%, depending on the circumstances. They could lead to long-term income for you.
Advantages Of Rent To Own Contracts
By collecting interest on the “loan” you provide to your tenant, you can effectively make more money than you would with a standard rental setup. The only issue is that you may lose the property if the tenant pays for the full term. A lot of rent to own tenants do not end up following through with their contracts, which could open you up to a new buyer or a new renter in the future. You will make more money per month from the current tenant than you would otherwise, and you will not have to refund anything if he or she backs out.
Because a rent to own tenant is acting as a buyer, he or she is more likely to take good care of your property. At that point, it is as if the tenant is the owner, so he or she may do renovations or build onto the property while under contract. If the tenant happens to back out, you end up with a piece of real estate worth even more than before.
Downsides To Rent To Own Contracts
Most people with good credit will go to a bank for a loan. Thus you will likely end up working with tenants who have had credit issues in the past. This is not to say that they will not pay well with you, but note that there is a possibility of that. You need to have a binding contract that protects you in the event of a bad tenant, and you need to take enough money down to cover your repair costs if the tenant leaves your property in disarray. If you can get through that, you will most likely earn more with a rent to own contract.
Screen your tenants carefully before going through a rent to own setup, and check in on your property during the duration of the loan. If you are not comfortable acting as a lender in this case, stick with sales and standard rental setups.