Reasons Why Rent-To-Own May Be Worth It for You

By: Bhagwan Makwana | Shree Balaji Group | September 23, 2020

Do you dream of owning your own home but are unable to make it a reality right now?

That’s the case for many Americans across the country. In fact, a recent study found that while 89% of Millennials would like to own their own home, roughly 67% of them will need to wait 20 years before they can afford a traditional mortgage.  

If this scenario sounds familiar, you could benefit from exploring the rent-to-own model. This strategy spins the home buying process in a new direction, making it easier for you to finally buy your dream home when the time comes. 

To help you decide if renting-to-own is the right path to homeownership for you, we’re taking a closer look at how it can benefit you as a buyer.

Rent-to-Own Explained

So how does rent-to-own work, anyway? 

Basically, rent-to-own resembles traditional renting except that the lease includes a clause where, after a set time, the renter can purchase the house. During this time, the future buyer pays rent and lives in the home, and a portion of the rent payments go towards their upcoming property purchase. 

Because the renter is actually making payments towards their home purchase, the future buyer can build equity in their property before they are technically the owner. 

So, let’s say you find a rent-to-own home that you decide to purchase. Before you complete the agreement for the lease, you and the seller will need to come to an agreement for the purchase price of the home. For example, the home price is $250,000 while the monthly rent is $2,200. 

At the beginning of your lease, you’ll be required to make a down payment of $15,000. Then, $400 of your rent payment will be applied to the purchase price of the home for the duration of the two-year lease for a total of $24,600.

With this rent-to-own agreement, you’ll already have paid a total of $24,600 towards the $250,000 price of the home at the end of the two-year period, leaving you with $225,400 left to pay on your mortgage.

You won’t be able to claim that equity until the sale is official, but it still provides a head start towards wealth creation — especially when you consider the fact that if you’re not owning a home, you’re inevitably paying to live somewhere. Instead of paying rent directly into your landlord’s pocket, that money can be going directly to the purchase of the home. 

Once the two-year lease is over, the home is yours and you’ll be paying mortgage payments instead of rent. 

Should I Rent-To-Own?

Upon first learning about this alternative to traditional home buying processes, most people wonder, is rent-to-own worth it? 

Since buying a home is a huge investment, there’s no clear yes or no answer that can apply to every aspiring homeowner. Rent-to-own is a unique way to achieve your property goals, but (like all purchase and sale agreements) it’s not a contract to take lightly. 

Asking ‘should I rent-to-own’ requires a well-rounded answer that covers all of the bases for maximum clarity to achieve the best possible outcome. 

Let’s explore the pros and potential cons surrounding rent-to-own leasing. 

Rent-to-Own Advantages 

What’s holding you back from your homeownership goals? Is it a weak credit score, troubles getting a loan, or not enough funds to support a downpayment? Whatever’s stopping you may be solved with rent-to-own. 

Rent-to-Own Your Way to Homeownership

Since buying a home can be expensive, most buyers need the financial assistance of a loan. However, getting a mortgage rate isn’t always easy. Getting the best-suited loan for you requires due diligence and a great financial standing. If you're a borrower with a weak credit score, it can be difficult to get an appealing mortgage.

But, rent-to-own provides an alternative buying process for taking out a mortgage loan and then buying a house. If you don’t have a strong enough credit score to move forward with a mortgage, you can actually build up your credit by making your rental payments on time before you buy. 

Click this link for the full scoop on rent-to-own vs mortgage loans.

Seller Benefits

The rent-to-own model isn’t only beneficial to buyers and renters. 

Thinking about selling your home? Consider making it a smooth transition with a rent-to-own strategy. Rather than put your home on the market waiting for an offer, you could be collecting rent payments, while working towards the inevitable sale.  

Additionally, a rent-to-own strategy can often reduce the associated costs that come with selling your home. 

All of these insights considered, rent-to-own can be a great option for both sellers and buyers alike. 

Possible Risks and Other Things to Consider About Rent-To-Own

As with any investment, rent-to-own homes come with their unique risks and potential cons. Remember, renting-to-own is a preliminary step towards buying a house. Of course, this model varies from a typical rental lease because both the stakes and the rewards are much higher. 

Here are a few possible cons to keep in mind when considering rent-to-own.

Higher Rent

When you rent-to-own, you’ll likely be paying more for your space on a monthly basis than you would be if you were simply renting. Rent-to-own rental payments are typically more expensive than the average rent fee because a portion of the money is going towards the upcoming home purchase. While these payments may seem large, it’s simply the equivalent of a strict savings plan — only more efficient. 

Maintenance and Upkeep

As a renter, your landlord typically takes care of building maintenance, repairs on major appliances, and in many cases, expenses like lawn care and snow removal are built into your monthly rent. But this usually isn’t the case with rent-to-own homes. You’ll likely be responsible for maintenance even while you’re still renting. 

It is an added expense, but it does provide the freedom to get a jumpstart on those renovations and improvements. Make sure you’re prepared to pay for both routine maintenance and any emergency repairs that may come up. Once you do own the property, don’t forget about homeowners insurance.

Extra Fees

These lease contracts usually require a one-time fee upon signing, and this won’t be refundable if you decide to drop out of the deal. Market shifts and other disruptors don’t cancel the contract. If for some reason, you decide to back out of the deal before purchasing the home, you won’t be refunded any of the monthly payments towards the purchase price either.

Changes in Value

The price of your home is locked in at the beginning of your new contract. However, you’ll be renting for an extended period of time before the house is actually yours. This means that while the value of your home could fluctuate to reflect the current market, your sale price will still stay the same. In some cases, this means the price of your home could be more expensive when it comes time to buy than it would be in the current market.

Is Rent-To-Own Right for You?

When contemplating rent-to-own, the biggest question to ask yourself is if this system is right for you. There are pros and cons involved, so make sure to do what works with your financial situation and goals. 

Thanks & Regards,

Bhagwan Makwana 

Sales Team Manager | Shree Balaji Group,

Ahmedabad | Mehsana | Baroda | Mumbai

Mo. No. - (+91) 9726428197

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