For many years, if you were looking for a place to live, the two choices were to buy or rent a house. Today, a third option exists: rent to own.
So, what exactly is rent to own? How does it compare to buying or renting a house, and when is it right for you? Read on to find out.
What is rent to own?
A rent to own agreement is a lot like leasing a car. You sign a contract, pay a deposit, and then go home with the car. As you drive around, you can assess the functionality of the car, including how well it drives, how much it costs to maintain and operate, and also how it fits with your lifestyle. During this time, you are also making monthly payments. Once your lease is over, you can decide whether to purchase the car or return it to the dealer.
Similarly, in a rent to own agreement, you put down a deposit for a house and then pay rent every month. The only difference here is that a portion of your monthly rent payment, as well as your initial deposit, accumulate towards a down-payment for the house. At the end of the lease or a pre-agreed period, you can elect on whether to purchase the property.
How do you rent to own?
In the UK currently, most of the homes that are available for rent to own are owned or managed by housing associations. If you don’t feel like shopping around for a rent to own property yourself, you can use companies such as Rentplus or Buy By Renting to help you find affordable rent to own opportunities.
The eligibility criteria for rent to own vary from one seller to another. Some sellers may only require you to have a good credit history as well as a specific minimum yearly income (either from formal or self-employment). Others may add extra requirements such as for you to be a first-time buyer.
Advantages of a rent to own agreement
In a rent to own agreement, you have more than enough time to ‘test drive’ a house to decide whether it fits your needs and lifestyle. Traditional buyers have just a few minutes or hours to tour a property and decide whether to buy. As a tenant-buyer, however, you can decide over a period of months or even years. You get to assess the living space, the maintenance and utility costs, and even the neighbourhood.
Rent to own allows you to enjoy the best of both worlds – that is, owning and renting. Instead of having to save first and then buy (a process which, sadly, can take a long time), you get to live the life of a homeowner right away.
A rent to own agreement also gives you the freedom to purchase or to walk away. This can be useful, for example, if the value of the house goes down over the lease period.
In a rent to own situation, monthly rent payments are established at the beginning, and these do not change. Therefore, you can relax knowing that there will no surprise rent increases. Similarly, the purchase price of the house is negotiated before you sign the rent to own agreement. Even if the value of the house increases, the purchase price will remain fixed.
Disadvantages of a rent to own agreement
Although the seller is responsible for major repairs, the responsibility for minor repairs and general maintenance will fall to you as the tenant-buyer.
The fixed purchase price of a house in a rent to own situation might also be a disadvantage if the property value drops below the original price negotiated at the beginning. Renegotiation of the price is at the seller’s discretion. There is, however, a way out in that you can choose not to purchase the property.
When is rent to own right for you?
Rent to own might appeal to the following three broad groups of people.
- People with a poor or no credit score – If you have a bad or no credit score and do not, therefore, qualify for mortgage, a rent to own agreement might be right for you. The rent to buy option can help you demonstrate a solid payment history and consequently improve your chances of being approved for a mortgage should you later apply for one.
- First-time buyers – As a first-time buyer, you might under normal circumstances struggle to save enough to make the down-payment. With the rent to own option, you might be able to move into the house you have always dreamed of now.
- The self-employed – Qualifying for a mortgage as a first time buyer can prove to be difficult, particularly if you are self-employed and cannot provide proof of income. A rent to own agreement may be your first step towards home ownership.
As with all major investment strategies, the rent to own option has its pros and cons. However, if you are currently not in a position to immediately buy or even put down the required deposit for a house, you might decide that a rent to own agreement is quite a good option. There are few things better than moving into your desired house right away without having to wait several years until you have saved for a down-payment. That’s what a rent to own agreement gives you – so hey, why not consider it?
- No savings at 40? I reckon you can retire rich with these tips
- Forget the Bitcoin price! Here's how I'd invest £10k to make a million
- I’ll hold this 11% FTSE 100 dividend yield in my ISA for at least 10 years!
- Forget buy-to-let. I’d aim for a multi-million pound retirement portfolio this way
- How should I invest £10k? 2 reasons why Warren Buffett’s advice could be worthwhile
- Top shares for 2019
MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.
The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.
Motley Fool UK 2019