What is Rent to Own?
Rent to own (also called lease purchase or lease-to-own) is a transaction structure where a tenant rents a property with the contractual right or obligation to purchase it at a predetermined price within a specified timeframe. Part of the monthly rent may be credited toward the purchase price. The tenant typically pays an upfront option fee for the right to buy.
Two types of agreements
A lease option gives the tenant the right but not the obligation to buy. If they choose not to purchase, they walk away, losing the option fee and rent credits. A lease purchase obligates the tenant to buy at the end of the lease term. Failing to purchase is a breach of contract. Most tenant-friendly arrangements are lease options.
How it works
The typical rent-to-own deal has three components: (1) a lease agreement covering the rental period (usually 1-3 years), (2) an option agreement granting the right to purchase at a set price, and (3) a purchase agreement that activates if the tenant exercises their option.
The option fee is usually 2-5% of the purchase price, non-refundable but credited toward the purchase price. Monthly rent may include a rent credit — an additional amount above market rent that accumulates toward the down payment.
For investors
As sellers or landlords, rent-to-own provides: a locked-in higher sale price, a non-refundable option fee, above-market rent, and a tenant who maintains the property well. Statistics show 30-40% of lease-option tenants never exercise their option, meaning the landlord keeps the option fee and rent credits while maintaining ownership.
As wholesalers, rent-to-own can be a creative exit strategy. If you cannot find a cash buyer, you might close on the property and offer it as a rent-to-own, collecting an option fee to recover your investment while earning monthly cash flow.
Risks
For tenants: losing the option fee and rent credits if unable to complete the purchase. For sellers: property values may increase significantly above the locked-in price, resulting in a below-market sale.