When moving into a new home you have a few choices to make. The main one is usually whether you want to buy or rent. Each offers its own advantages. Buying gives you full ownership of the property and all of the flexibility that comes with that. Renting offers less of a commitment and offers several protections that you may not enjoy when buying, such as ongoing maintenance as part of your rent.
However, there is a third option that offers something of a middle ground. Rent-to-own is becoming an increasingly popular concept.
What is Rent-to-Own?
The core idea behind rent-to-own is actually fairly simple. You start renting a place and pay your rent payments as you would with a normal rental property. However, under a rent-to-own structure, the money you pay towards rent actually goes somewhere. Instead of it all going into your landlords back pocket, some of that money actually allows you to build some equity in the property.
In essence, you can build up a deposit for the home while living there. After a few years of renting, you may have paid enough to commit to the full purchase. You can then make a choice of whether or not the property is right for you and move forward from there.
The Pros
So what’s good about the rent-to-own arrangement? There are a few things.
- Try Before You Buy. Spending some time in the property really gives you a better feel for what it has to offer than the traditional viewing that buyers undertake. You can work out if there are any issues that you need to concern yourself with and find out if you can actually make the house a home.
- You don’t need to make the full commitment to the property that you would if you were buying in the traditional fashion. You can rent for several months, or even several years, before you make any decisions. This gives you the chance to move on if the property isn’t right for you. This makes rent-to-own ideal for those who may have to move for work later or people who aren’t absolutely sure they’ll be able to keep up with mortgage payments.
- Fixed Price. The agreement will set the value of the home at a fixed price relative to the market at the time you signed the agreement. This means that you may pay less than the value of the property later on down the line, depending on how the property market goes. This can be a double-edged sword. If your market declines, you may end up paying more than the property is worth.
The Cons
It’s not all good news. There are several cons that you also need to keep in mind.
- The Cost. Most landlords will add extra to the standard rent payment in a rent-to-own agreement. This adds to your short-term bills. However, that extra money goes towards the equity you build in the property.
- No Guarantees for Landlords. From the landlord’s perspective, rent-to-own can offer some uncertainty. If the tenant chooses not to buy the property, the landlord has to start all over again. This can lead to comparatively few rent-to-own properties on the market when compared to traditional renting and buying options.
