You have probably seen ads for Rent-To-Owns, but most people don’t know how they really work. The premise is simple though. An investor buys a property that a want-to-be homeowner wants. The want-to-be homeowner is a tenant in the property for a period of time where at the end they will then purchase property at a pre-determined price. The home-owner-to-be is commonly referred to as a “Tennant Buyer”. The tenant buyer pays the investor for this facilitation.
The tenant buyer is currently unable to purchase the property themselves due to lack of down payment and/or bad credit. They pay rent plus two premiums. One premium is to build up a down payment, the other premium is for the investor as security and to make it worth their while. At the start of the deal, the tenant buyer also usually puts in some cash upfront (Usually not enough for a full down payment). During the agreed upon period, the tenant buyer builds a down payment and rebuilds their credit if need be so they can qualify for a mortgage at the conclusion of the deal. When the deal is complete, the tenant buyer buys the property from the investor as agreed upon.
The investor has a lot of protection in these deals. With the money up front and the two added monthly premiums, there should be a fair bit of cash on the table for the investor to protect themselves if the tenant buyer doesn’t uphold their end of the deal. Generally, the tenant buyer will take at least reasonable care of the property as they are intending to buy the property. If they don’t pay they lose all the cash they put in the deal. The investor is then left with a property that they must unload, rent or find another tenant buyer for.
This sounds like a good deal for the investor. Indeed, I would tend to agree. It can also be a good deal for the tenant buyer as it solves the problem of not being able to purchase they house they want (and can afford the payments on). The problem for the investor is that there is a large amount of work to find and qualify tenant buyers. The investor must have down payment cash (or have another investor that does) and must be able to qualify (Or the other investor) for the property. Even with the large amount of incentive to follow through on their commitments, these deals end up falling through leaving the investor(s) with a property that they need to unload, rent, or RTO again. The contracts for these deals are also quite complicated.
Rent-to-Own is another great type of real estate investment, but this one requires LOTS of extra training and it takes a lot of time to execute, but it can make you a fair bit of cash that can be used for whatever you need (Often to fund down payments on Buy-Rent and Hold investments).
I personally do not posess the skillset or knowledge base to attempt one of these deals, but I would invest in one that an experienced RTO investor with a good track record has properly set up.