One of the most troubling aspects of being a property owner is a negative cash flow. Apart from bad tenants, negative cash flow is the only thing that gives the owners a hugely annoying itch on the back, in a place where they can do nothing. Most of the owners can live with the fact that their properties are not producing any profits, but when they start incurring losses, they tend to lose their patience.
An owner cannot ride the storm solely based on the hope that they can make money when the real estate cycle turns into the in their favor. Most of the property investors purchase property solely in a long term view. This makes investing heavily into the property an impractical option.
The tightening of mortgage rules has, in proverbial terms provided “light at the end of the tunnel”. The recent changes make all the buyers without good credit, stable income or cash to pay a substantial down payment ineligible for mortgage. Such disqualified buyers make an ideal partner in the short term “Rent to Own” method.
This strategy is designed in such a way that the tenant buys the property from the owner a few years down the line. A typical Rent to Own agreement has the following transactions.
1. The prospective buyer moves into the property as a tenant after paying a small amount as a down payment.
2. The tenant pays the owner a rent, which has a fixed component contributing for the purchase down the line.
3. Five years later (just an approximation), the tenant purchases the property from the owner, who deducts the monthly component from the price of the property.
Both parties involved in this transaction are benefitted from this kind of agreement. The tenant finds a home that can become their own in a few years down the line. As a tenant stays on the property, they can find out the various advantages and disadvantages of staying at that location first hand. This allows the tenant to make an informed decision at the end of the day.
The owner finds a perfect solution for his problem: negative cash flow. A typical tenant does not contribute to the necessary repairs or maintenance of the property. These works fall under the domain of an owner, which contributes to an increase in the expenditure incurred by the property. On the other hand, a “Rent to own” tenant takes care of the house in a better fashion, as they typically treat the house as their own. This decreases the expenditure and solves the negative cash flow problem.
The presence of a Rent to own tenant ensures a steadied source of cash flow that helps in generation of regular income to the household. The additional component paid every month is handy whenever the owner encounters an unexpected pitfall. The result of a Rent to own agreement is an extremely conducive scenario for all the parties involved in the transaction.