9 Reasons to Sell Houses via Rent-to-Own

There are numerous ways to sell a house. One of the more traditional routes is hiring a Realtor to list the home in a multiple listing service (MLS) and sell the house for you. If you want to avoid paying for a Realtor, you could sell with owner financing. When people ask me how I've been able to close 27 deals in the last 12 months, I tell them about my rent-to-own strategy.

Rent-to-own is also known as lease purchasing, which is when the seller and buyer enter into an option agreement. The buyer becomes a tenant buyer, and pays rent to the seller over a set period of time. (I usually set this term at 12–24 months.) During this time, the buyer is getting ready to take on the mortgage. Once they're able to obtain a mortgage, the seller transfers the property's title and deed to the buyer.

Selling a house with this strategy sounds more complicated than traditional methods, which is why many real estate investors avoid this option. I’m here to shine light on nine reasons why selling rent-to-own is a profitable way to cash out on a property.

1. Highly Motivated Buyers

When people buy a house via rent-to-own, their primary reason for doing business with you is to get on the road to owning a home. Most tenant buyers either don’t have a high enough credit score to qualify for a mortgage, or they are self-employed and can’t actively verify income. Selling on a rent-to-own basis means you are working with highly motivated buyers who want to do business with you.

2. Immediate Cash Flow

With rent-to-own properties, the buyer pays an option fee, which is the legal term for a non-refundable lease option deposit. This option fee is never any less than 5% of the purchase. I once received an option fee of $64,000 on a $280,000 sale. The buyer was willing to pay this large option fee because 100% of the money goes toward the purchase price of the property when the buyer is ready to close.

Keep in mind that if the buyer isn’t ready to sign off on a mortgage in the period of time you agreed upon, the seller can extend the term and charge the buyer another option fee. If my tenant buyers have been holding up their end of the deal on getting themselves ready for a mortgage, then I extend the term and don’t charge another option fee. If a tenant buyer decides not to extend the term moves out of the house, the option fee they paid is non-refundable. The seller keeps every penny of the option fee and can turn around and charge a new buyer another option fee. This allows you to maintain cash flow.

3. Positive Monthly Cash Flow

The difference between the rent you are bringing in each month and your underlying debt is your positive monthly cash flow. Your debt would likely either be with the mortgage company or the private lenders who loaned you the money. By utilizing rent-to-own, you enjoy getting to pocket the spread each month between what the tenant buyer is paying for rent and what you're paying the mortgage company or a private lender.

4. Non-Traditional Landlord

Rent-to-own agreements are different than traditional tenant-landlord relationships. When I sell via rent-to-own, my buyers have 30 days to go through the property, get the home inspected, and report any major components of the home that are not working as intended. This includes windows leaking, doors that don’t close right, hot water systems not working, or problems with the HVAC. I’ll take care of any problems reported within the first 30 days. After that, they are 100% responsible for any repairs. With most typical rental agreements, the landlord remains responsible for many major problems that could arise as long as they own the property.

5. Depreciation is a Tax Write-Off

If you own the property, even if the buyer is renting from you and living on the property, you can write off depreciation of the property on your taxes. Because the buyer is a tenant buyer, until they are ready for a mortgage, can close on the house, get the title and deed transferred to them, you get to take advantage of the depreciation.

6. Property Price is Higher

When I enter into a rent-to-own agreement, I set the price 5–10% above what the home would appraise for at the time the agreement is signed. This is because I want to take advantage of the projected property appreciation. I give my tenant buyers 12–24 months to get ready for a mortgage and move toward cashing out. I don’t want to shoot myself in the foot and give up the additional profit on what the house will be valued at in the future.

7. Interest Tax Benefit

There’s yet another tax benefit for selling via rent-to-own: you can write off the interest. If you’re making interest payments to the private lender who funded the deal for you — or you bought the home subject to the existing note and are making interest payments to the mortgage holder — you're eligible for this particular tax benefit.

8. Zero Inspections

When you’re selling a house through an MLS, the buyer will likely listen to their Realtor's advice and get an inspection. This is good advice. If you’re buying a house you’ve not spent any time in, you should get it inspected! It will cost a few hundred dollars, and the inspector will find every minute thing that could be wrong with the property immediately or down the road.

In the world of selling with a rent-to-own strategy, there is typically no inspection when it comes time for buyers to cash out. This is because the buyers have already been living in the house for six months — or even two years! They already know if there’s anything wrong.

9. Profitable Long-Term Exit Strategy

All of these factors — the cash flow, the tax benefits, and not having to pay for repairs or inspections — are why selling on a rent-to-own basis is incredibly profitable. However, you need to keep in mind that this is a waiting game. It usually takes me between 12–24 months to cash out, because I require the buyer to enter a credit repair program when they sign the agreement. With this requirement, I’m able to cash out 80% of the buyers I sell to via rent-to-own.

There you have it! Nine reasons you should sell houses through rent-to-own. There are many benefits to real estate investors, but there are benefits for tenant buyers. As stated earlier, buyers who enter a rent-to-own program often are unable to purchase a house through traditional methods. You are helping them enjoy the American Dream of homeownership by selling using a non-traditional method. Everybody wins, and that’s the best way to do business.

If you found this article enlightening, share it with your network! And let me know what other benefits there are in selling a property rent-to-own.