Rent To Own Real Estate Revenue Recognition

[az1412]

Hi there,

Im wondering what would be the revenue recognition for a rent to own scheme whereby customers can pay rent for say 3 years (with above market rate premium) and the cumulative rental money will be used as their deposit to buy the property.

Say the house costs 300k and monthly rental is 1k. So for three years, the total rent money is 36k. And after the third year, the tenant will have the option buy the house at 300-36 = 264k orrr a different house priced at 350k but the 36k is deducted from the price (essentially the total rent money is used as deposit) so the house is priced at 350-36= 314k.

alternatively, the tenant my not choose to buy and pay a cancellation fee.

The revenue recognition seems similar to finance lease, however, what would the cost recognition be and would the unsold house need to be valuated or is recorded in inventory as its original amount?

Thanks!

 

[Simon W]

I know this is an old post, but no one seems to answer it.

First, you should be separating the income and the % of rent payment towards the house.

The full $1000 shouldn't be towards the house.

At the very least you should break even as Revenue - Expenses and Debt.
If you are the owner, and you are renting out to a tenant you have the responsibility of paying property tax, home insurance, and any common area such as snow/trash removal, landscaping, and etc. Unless you have it in the lease agreement that the tenant will do those things.

Annualized Numbers:
Asset:
Rent Revenue: $8400 (70%)

Liability:
Tenant Down Payment: $3600 (30%)
Mortgage Payable: $2000

Expenses:

Tax: $4000
Trash: $300
Snow: $500

As you can see, I am just pulling numbers out of thin air.

Net Income: $3600 ($8400-$4000-$300-$500)
Net Cash Flow: $1600 ($3600-$2000) <~ this is your gain.

By the time the 3rd year ends and the tenant is executing the agreement to purchase, you would debit cash and credit the tenant down payment.

Reality is that it won't be $36k as down, but more like $11k.

Hope this makes a bit of sense.