How Many Ways Can You Purchase a Rental Property?
- A lease option is one way for tenants to purchase the property they rent. Lease options are available to tenants who rent stand-alone homes or rent-to-own condominium units. They cost extra to include in a lease but allow the tenant to purchase the property outright at the end of the lease term, with a portion of each month's rent going toward the purchase price. Lease options vary in terms of price and when the tenant must decide whether to exercise the option. They also give tenants the freedom to finance the purchase with any type of mortgage or personal loan. Tenants who exercise lease agreements can move out and rent the home to someone else, or remain in it as a primary residence.
- Many rental property purchases take place using the same types of mortgages that home buyers use to purchase private residences. These mortgages vary in terms of their interest rates, fees and term lengths, ranging from five years to 30 years or more. Adjustable-rate mortgages mean the landlord is subject to an interest rate that can rise over time, increasing the likelihood of refinancing at some point in the future. Fixed-rate mortgages are more stable and allow the rental property owner to predict each month's payment as part of a business model where rent from tenants constitutes the majority of the mortgage payment and the growing equity represents profit for the landlord.
- Another option for purchasing rental property is through a short sale. The mortgage for this type of purchase can be any type of standard mortgage, but instead of purchasing a home from the owner, you submit an offer to purchase the home for less than the owner owes on it. Property owners generally pursue short sales when they see their property value drop, which means buyers stand to save a great deal of money if the lender agrees to the sale. However, short sales take a long time to process, which means rental property buyers must be patient and already have a personal residence to use while waiting for the sale to proceed.
- Renovation mortgages are an option for rental property that needs significant repairs or becomes part of the new owner's plan for a comprehensive overhaul. These mortgage loans include enough to buy the property as well as money to invest in renovations. These can include necessary repairs to bring a neglected rental property up to code, or more elaborate renovations that turn an existing property into a luxury rental. To receive a large enough loan for a renovation mortgage, the buyer may need an excellent credit history, collateral or assistance from tax incentives that a government offers to encourage revitalization of an eligible neighborhood.
