What is Rent to Own?
You may have heard of the concept of rent to own. It can be a good way for landlords to make money and a good way for tenants to get into the real estate market soon. In this article, we’ll look at what is rent to own and how it works.
What is Rent to Own?
Rent to own is an agreement that landlords and tenants can enter into together. It’s very similar to the typical landlord-tenant relationship, except with an important difference. The landlord is still renting out their place to the tenant. However, the tenant pays a slightly higher rent amount. This higher rent amount is called a rent credit and goes towards the eventual down payment the tenant will need to buy the property.
In most rent-to-own agreements, the tenant has the choice of purchasing the property in the middle of the lease or at the end of the lease. However, if the tenant has signed a rent-to-own agreement and chooses not to move forward, they may be losing the rent credit built up over time.
Rent to own can be profitable and risky for both parties involved. In a rent-to-own agreement, the landlord agrees to sell the tenant their home months or years in advance. An assumption is made for future home price appreciation. If home prices increase more, the tenant wins, but the landlord wins less if home prices increase less. As long as both parties are aware of the risks, it can be a good arrangement.
The typical rent-to-own agreement is for between one to five years, although the landlord and tenant can choose whatever length works best for them.
How It Works?
Two contracts are involved in rent to own. There’s the rental agreement that everyone is used to and the rent-to-own agreement, which is new for many people. The rental agreement is what landlords and tenants usually sign. Many provinces and territories have standard templates to complete.
The rent-to-own agreement is a little different. It’s what’s signed between landlord and tenant to do rent to own. There are two kinds of rent-to-own agreements: the lease option and lease purchase.
The lease option lets the tenant buy the home if they choose, but they don’t have to if they choose not to. This gives the tenant the utmost flexibility. The tenant can choose to move forward and buy the home or walk away. The ball is in the tenant’s court. A lot can change during the rent-to-own agreement. The tenant could get a new job in a new city or need a new home for a growing family. The tenant could decide not to move forward and get their rent credit money back.
The lease-purchase is when the tenant agrees to purchase the home from the landlord during the rent-to-own agreement or at the end. If the tenant decides not to buy the home from the landlord, it could mean losing the rent credit money. That’s why a tenant should think carefully before agreeing to this.
The Bottom Line
Need some help decide whether rent to own is right for you? Speak to mortgage experts for a helping hand whether you’re a landlord or tenant.