Rent to Own Investing

Controlling Real Estate with Little or No Money Down

Rent to own investing is a way to control real estate with little or no money down. Why make an investment in rental property with your own money if you can get the seller to do it for you?

In other areas I discussed real estate investment loans and land contracts. These are both good strategies to use to find money for your real estate investment. But, what if you want a low risk investment? The rent to own investing strategy that I am going to share on this page will help you control real estate with no money down (or as little as possible).

There are two types of motivated sellers trying to get out of their homes:

• Those with some equity in their property and good credit, but just can't sell their homes (and maybe are paying two mortgages)



• Those who have little equity in their homes and are in danger of going into foreclosure.

And from that pool of sellers we can use two separate strategies for no money down investing:

• Lease options


• real estate "subject to" Deed transfers

With rent to own investing you can even get a seller to pay you to take over their mortgage! I'll discuss this more in a bit, but let's see when each of these strategies will work and which strategy of rent to own investing is best.

There are many (if not most) sellers who have some equity in their homes and pretty good credit. For various reasons, they have to sell their house. It might be due to divorce, death of one spouse, job transfer, whatever. Due to market conditions, they are unable to sell their house or may be unwilling to take a loss on it. So they hold on to their price for too long. Real estate that sits on the market too long becomes stale and Realtors tend to overlook it. So they think about renting or leasing the property. These are the type of sellers that are good candidates for lease options. Your goal as an real estate investor is to try to get a long term lease (at least 5 years) with an option to purchase the property. You also want to pay as little as possible for the option.

The other critical step in controlling this type of rental property is to get the right to assign the lease. This is called a "sandwich lease", since your intent will be to use a lease-option to "sell" the property. In addition, you might try to negotiate rent credits with the seller as well as the right to sell the option.

The way to make money controlling real estate with lease options is to sandwich the lease you get by lease optioning your property to someone else. I cover how to do this extensively on the section of Rent to Own. What you are trying to do is get a spread between what you pay the Deed holder (seller) and your rent to own tenant. You can get a spread in monthly lease payment amount, the option money and rent credits. Here's a table showing how the differences can work for you (this is an actual sandwich lease that I have):

Some other considerations when using a lease option agreement:

• Have the seller give you Power of Attorney and take over mortgage payments for the property.


• Have the seller provide a notarized statement that there are no liens on the property


• Have the seller fill out a property claims disclosure just in case you find some problems afterwards


• Send the lender a notification with your Power of Attorney letter to let them know that you will responsible for the mortgage and have payment notices sent to you

The second type of structure a rent to own investing agreement might take is a "subject to" form. This is a much more powerful for you as a real estate investor. In this situation you would actually acquire the Deed to the property. This type rent to own agreement will not work if the seller has equity in their property and a good credit history. It is much more likely to occur when the seller is either in danger of falling behind in their mortgage payment or already behind. Rent to own investing can even be used in a pre foreclosure short sale. This type of deal is the ultimate no money down real estate investing deal

There are two risks to you as the investor. The first is that the property value is less than the remainder amount of the loan balance. The second is that the loan that you are taking over is an adjustable rate loan. The first time I did a subject to deal the loan was an ARM. The interest rate shot up from 7% to 11% within 1 year after I took over the loan. Fortunately, it fell again making the property cash flow positively.

One objection that people have with using a subject to agreement is the fear of the bank exercising the "due on sale" clause. Most mortgages have a due on sale clause. While technically the bank can call such a loan, they are not likely to (unless it is a low fixed interest rate loan and loan rates shoot up - which they may do).

There are three things that I do with my subject to investing deals:

1. Get the sellers to give me Power of Attorney



2. Have the sellers assign me the proceeds from the escrow account



3. Have the seller sell the property to a Trust

A bank generally will not investigate a transfer if it is into a Trust. Consequently, the possibility of the bank exercising the due on sale clause is diminished.

Finally, if the seller has some money and was considering trying to sell their house through a real estate agent, you may actually get the seller to pay you to take over their Deed. This is better than buying real estate with no money down - its getting control of real estate and getting cash back. A great deal for you!

Rent to own investing is just one of many creative real estate investing ideas you can pursue to reach your real estate goals.

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