I know what it's like to rent this house. What will it be like to rent-to-own it?
July 11, 2010 8:38 AM   Subscribe

How does rent-to-own (lease option) work when there are multiple units and multiple renters (tenants of the apartment below me plus my current roommate) and only one rent-to-owner (me)? Can rent-to-own be arranged retroactively? Does having a co-borrower reduce the amount of down payment I'd need in order to qualify for a mortgage?

Rent for the building is $2500 per month. The house has two units - One rented for $1000 and the other rented for $1500. A young family occupies the first unit and the cost of the second is split between me and my roommate, $750/$750. Since this market favors the buyer, my rent payment would not be increasing in a rent-to-own arrangement: I would continue paying the same amount and ask that a portion (if not all of it) go into escrow for a downpayment, as an incentive for me to buy the house, and the seller will most likely pay the closing costs. I'm going to get a lawyer if I go through with this, probably a buyer's agent as well.

1) My landlord and I have not decided how much of my rent would go into escrow toward a downpayment, but if I did rent-to-own, how would the logistics of the rent payments work - Would all the other tenants pay me first, with me then paying the owner the complete $2500 total? Or is it possible to have the payments continue as they have been?

2) Could we retroactively arrange for rent-to-own - i.e., apply a portion of the rent I've already paid for the past year toward the downpayment?

3) My mother has helpfully suggested that she be a co-borrower on the mortgage, which would certainly help in terms of the total amount they'd allow us to borrow, but would it help me reduce the required down payment?

More backstory:

Despite frugality and aggressive saving, I'm going to have a hard time swinging closing costs and a down payment because I -just- paid off about $25,000 in student loans. On the bright side, I'm now debt free and my credit should be great! My expenses are far below my income! I've had steady employment with the same company for over four years! On the less than bright side, I only have about $13,000 plus another $6,000 in my 401k, and I don't want to touch any of this money - A girl's gotta have her emergency fund, after all. If I do rent-to-own for the next year, I can conceivably save up a decent downpayment in addition to whatever portion of my rent gets set aside in escrow. In the meantime, I'm going to meet with a highly recommended mortgage professional to see how much house I currently qualify for... If I could somehow get away with buying the house for $3,000 out of pocket, I would, but I don't see that happening.

The eventual plan is to have my mom rent the bottom apartment from me while I live in the upper apartment with a roommate or two. The house is beautiful and is less than half a mile from the local college, so I won't have any shortage of potential roommates in the future - For the past five years or so, the unit I'm in has been rented by college students. Owning the home and renting out most of it will result in a net monthly mortgage/insurance/tax charge that is less than half the rent I'm currently paying, allowing me to save even more aggressively.

Any advice is appreciated!
posted by lizzicide to Work & Money (2 answers total)
$6,000 in my 401k, and I don't want to touch any of this money

^^ This is key. Never touch that money :).

#1 - Anything is negotiable

#2 - See #1.

#3 - You would still need 3.5%-5% down.

You can usually work out the seller covering closing costs (ie, you pay $155k for the $150k house, they kick back $5k at closing). (I see you already covered this).

Separate from your question -- Keep in mind owning, and specifically owning a rental isn't a walk in the park. You will need $$ to cover not only your mortgage, but also maintenance of the house that you don't live in, dealing with issues with tenants, and dealing with laps in tenants (ie, what do you do for 2 months when your tenant leaves and you can't rent).
posted by SirStan at 9:04 AM on July 11, 2010

Response by poster: Your concerns about landladying are duly noted, SirStan, though one of the benefits of renting the downstairs out to my mother is the degree of stability that comes with having her for a tenant. We've financially been a "team" for years, so I'm very confident that our goals are aligned. My income and my mom's income combined are enough to cover the entire mortgage if need be, but having an additional tenant will allow us to save more aggressively and pay down the mortgage - Buying this house and using rental money to accelerate mortgage payments is one of the ways that I'm planning to provide for her in retirement, in fact.
posted by lizzicide at 9:26 AM on July 11, 2010

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