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If you’re investing in Florida real estate right now, could rent-to-own solve some of the known problems with the Sunshine State’s real estate market?
Florida has always been one of the most coveted and popular real estate locations in the country, but it’s not without its problems for investors right now. Rent-to-own is well worth exploring for Florida properties, but first, we need to determine the dynamics of the market that make the state a good candidate for this specific type of real estate investment.
Like all other forms of investing, rent-to-own can be the right choice (maybe even the Holy Grail for some), but you do need to understand when this type of investment is appropriate. Let’s take a closer look at what these conditions are.
When is the right time to invest in rent-to-own?
Investors considering rent-to-own should consider two main factors. The first is whether there is strong demand for housing in the places they are considering investing. The second question is whether there are a large number of potential buyers who are not yet able (or willing) to purchase the property. Typically, this happens in hot markets that are also facing issues with affordability, inventory, or other key market parameters.
As an investor, you are looking at a real estate market that is currently slow due to tough market conditions, no Because the area is not popular. Think of it this way: If you’d be better off selling the house in a few months or years and making more money by renting it out than flipping it now, rent-to-own might be a good option. You can lock in a buyer now and still sell at market price when the time comes.
Timing plays a big role in making the decision to invest in a rent-to-own property. If you are investing in a market that is currently booming, with a large number of qualified buyers and properties selling like hotcakes, then you should choose the house flipping option. But if things aren’t going so well in the housing market—that is, a lot of people want to buy but can’t—and the housing market slows down as a result, rent-to-own could be the perfect compromise between house flipping and long-term rentals the property of.
Why Florida is the perfect rent-to-own market right now
Florida is shaping up to be a perfect rent-to-own market because it offers the precise combination of factors that make this investment option attractive.
Florida’s population is booming; in fact, Florida will be the fastest-growing state in the United States in 2022-23, with hundreds of thousands of new residents coming to the state each year. Urban areas like Orlando, Tampa, and Miami attract the most movers, but so do smaller metro areas like Sarasota and Fort Myers.
However, Florida’s home sales market is stagnant. Even popular destinations like Miami are rated as “less competitive” markets by Redfin; few homes receive multiple offers, and most sell below list price (an average of 4% below list price).
It may seem like a contradiction, but the fact is that Florida is facing a serious affordability crisis. Home prices continue to rise as inventory continues to be scarce. The state’s current average home price is $397,137, which is nearly $43,000 higher than the national average of $354,179. However, potential buyers face high interest rates and some of the highest home insurance premiums in the country.
result? The state’s housing affordability is “the lowest it’s been in four decades,” said Moody’s Analytics housing economist Matt Walsh, who told Newsweek that existing home sales in the state are at “The lowest level since the financial crisis.”
Despite the high housing prices, Florida is not a seller’s market right now. While home prices in Florida continue to rise, the number of home sales is down, with the average time homes stay on the market a full week longer than a year ago, according to a recent Redfin report.
That doesn’t mean people don’t want to buy homes in Florida, or that Florida’s real estate market is not looking good. The current situation simply means that now may not be the best time to sell. Many buyers are waiting for mortgage rates to be slightly lower than they are now; others may be looking for a solution to the home insurance crisis.
Having the option to purchase a home that is currently being rented will appeal to many potential buyers. They don’t leave; they just wait.
For renters, rent-to-own can feel like starting the process of purchasing a home months or even years before the actual purchase. This is ideal for potential buyers who are on the fence or need more time to come up with a down payment on their future home.
But what’s in it for investors?
Investor Advantages: Cash Flow and Security
For investors, the most obvious advantage of rent-to-own is that it provides you with stable cash flow, with rents often exceeding market rates. Tenants in rent-to-own properties tend to stay put, and high tenant retention rates mean less lost income from vacancies between tenants.
Additionally, tenants who live in a rent-to-own property tend to have better care taken of them – after all, they plan to live there for a long time. In fact, as a rent-to-own landlord, you can generally expect your tenants to assume many of the responsibilities that would normally be the responsibility of a landlord. From mowing the lawn to making repairs, a rent-to-own lease offers more room for tenants to participate in the upkeep of the property. This is actually a big benefit for out-of-state investors or those who simply want a more passive investing experience.
In addition, the non-refundable option fee that tenants pay to obtain the right to purchase increases the upfront profitability of the transaction. Additionally, there is built-in appreciation (usually around 10%) in the price a tenant pays at the end of the lease when they purchase the home.
How does rent-to-own work?
In a typical rent-to-own agreement, the buyer agrees to lease the property for a certain period of time, usually up to five years, with the option to purchase the property at the end of the lease for a pre-agreed price. During the lease, part of the monthly payment is credited toward the down payment. Some rent-to-own agreements obligate tenants to purchase the home, while others only give them the option.
When you’re investing in a volatile market, locking in the sales price at the start of a rent-to-own agreement is a good option. If you are confident that home prices will increase significantly by the time the tenants are ready to buy, you can draft an agreement where the final sale price will be based on the current market value of the home at the end of the agreement.
Whichever configuration you choose, be careful to set a sales price that will generate a profit, but is not so high that the property is overvalued, as this would create mortgage problems for the tenant buyer.
Before drafting a rent-to-own lease, make sure you do your due diligence. This will include research on local market trends, the legal details of rent-to-own contracts and the financial stability of potential tenant-buyers.
Investors should also consider working with a real estate professional who specializes in rent-to-own properties. These experts can provide valuable guidance in establishing fair and profitable agreements and ensure compliance with state and federal regulations.
final thoughts
Florida is the perfect rent-to-own market for both buyers and sellers, offering the former an alternative path to homeownership and the latter a potentially lucrative investment niche. The Sunshine State is a unique real estate market with high demand for properties, but it presents multiple barriers to home ownership that are likely to persist into the near future. If your current goal is to avoid selling prematurely, then rent-to-own can help you generate steady rental income from your investment while ensuring you end up selling at a good price.
This article is provided by IDG
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
