Are you a renter who’s tired of never quite feeling like you own your place? Or maybe you’re a homeowner who’s been through one too many costly repairs and is looking for a more affordable option? Owning and renting are the two most common options that people think of in real estate. Despite the hot real estate market, or perhaps one reflection of it, owning an affordable home has become the preferred strategy for participating in real estate, particularly if you do so by Buying a house for the price of a car.
With MY SMART COUSIN we help familiarize prospective investors and homebuyers with the benefits of investing in properties, and more importantly, walk with them, step-by-step, through a customized roadmap to buying their house for the price of a car. If moving from planning to action sounds like just the medicine you need, we’re here to help you take your finances and investments in a new direction. We specialize in helping Black and Brown folks and women understand the benefits and mitigate the risks of investing through real estate purchases, and building a portfolio of monthly income.
If feeling like you’re a perpetual renter with no clear path on how to step into home ownership sounds like you, then examine your current digs and ask, is it exactly the kind of nest that you’d like to own someday rather than continue renting. If the answer is yes, then rent-to-own might be a great vehicle to acquire a house. Rent-to-own, while open to everyone, is well-suited for those who need a little more time to line up a down payment, or to raise their credit score to qualify for a mortgage.
In this article, we will outline everything you need to know about rent-to-own agreements and how they work. Keep reading to learn more!
WHAT IS RENT-TO-OWN AND HOW DOES IT WORK?
Rent-to-own agreements are contracts between a tenant and a landlord that give the renter the option to purchase the property they are renting at a later date. These agreements are typically used when the renter does not have the necessary down payment for a mortgage or is not able to qualify for one.
Under a rent-to-own agreement, the landlord agrees to hold onto the property for an agreed-upon length of time, usually one to three years. During that time, the renter pays an amount above the normal rental price, which goes towards the eventual down payment required to purchase the property. At the end of the rental lease, the renter has the option to purchase the property, typically at a price agreed upon in advance. If the renter chooses not to purchase, they simply vacate the property, just as they would if they moved from a typical rental home, with no further obligation to the landlord.
THE BENEFITS OF RENT-TO-OWN
Many people dream of owning their own home, but the upfront cost can be cost-prohibitive. In addition, the process of securing a mortgage— particularly in the midst of today’s market uncertainty, what with high inflation, rising interest rates, and a looming recession— can be complex and unnerving. Rent-to-own arrangements offer an alternative path to homeownership.
· SUFFICIENT TIME TO SAVE FOR A DOWN PAYMENT
Rent-to-own can be a great option if your finances have you sidelined due to insufficient savings. With rent-to-own, time is your friend, giving you the flexibility and structure you need to save a specific amount of money by a fixed date.
· CONVENIENT FINANCING
Rent-to-own agreements often come with less stringent credit requirements, making it easier to qualify for financing. And, because a portion of your monthly rent payments will go toward the purchase price of the home, you’ll already have a head start on the financing.
· BUILDS EQUITY
A percentage of your rental payment goes towards the down payment or equity value of your home. As a consequence, with each monthly payment, you’ll be closer to becoming a homeowner and building equity in your house.
· AMPLE AMOUNT OF TIME TO TEST YOUR NEIGHBOURHOOD
Rent-to-own can be a great way to look at your community through the eyes of a prospective property tax-paying homeowner. Conveniences and irritations regarding the neighborhood and nearby amenities can be evaluated anew and considered over a span of years before committing to a purchase.
· THE OPPORTUNITY, AND OBLIGATION, TO OBTAIN FULL CONTROL OF THE PROPERTY
Rent-to-own agreements can be structured to provide the tenant with both the right and responsibility to make a menu of maintenance decisions and design changes, without landlord input. In such instances where the tenant is given a free hand to customize the house, the costs are often paid by the tenant. Thus, should you decide to paint your home entirely in purple, for instance, your landlord’s approval, or more likely, swift disapproval, is not a factor. That said, the cost of this new aesthetic will be paid for by you.
This latitude can be a big plus for people who want the flexibility to truly treat the home as their own and renovate it to their liking.
· NO BURDEN OF TAXES OR PROPERTY INSURANCE
Rent-to-own agreements often come with no requirement to pay property taxes or property insurance, which allows the tenant to try out homeownership without bearing the full cost of homeownership.
If you’re considering a rent-to-own agreement, be sure to do your research and work with a reputable landlord. By understanding the process and being aware of the potential risks, you can ensure that rent-to-own is right for you.
DISADVANTAGES OF RENT-TO-OWN
While rent-to-own is a great way to get your foot in the door of homeownership, there are a few potential drawbacks to consider before signing on the dotted line.
· First and foremost, once the lease period is up, you will still need to obtain a mortgage to purchase the property.
· Additionally, the landlord may include clauses in the contract that make you responsible for their mortgage debt if they default on their payments. This could leave you on the hook for thousands of dollars, and damage your credit score in the process.
· Finally, the fees built into rent-to-own agreements are often larger than those for renting an apartment or purchasing a home.
Before entering into a rent-to-own agreement, be sure to do your homework and weigh all of your options carefully.
HOW TO FIND A RENT-TO-OWN HOME?
Maybe you don’t have the credit score or the savings for a traditional mortgage right now. Maybe you’re not sure you want to settle down in one place just yet. Or maybe you’re simply tired of throwing away money on rent with nothing to show for it at the end of the lease. Whatever your reasons, you may be considering a rent-to-own home. But how do you find such a property?
· First, talk to a real estate agent. They may know of landlords who are looking to sell their property through a rent-to-own agreement.
· Another option is to ask your current landlord if they would consider selling the home to you through a rent-to-own arrangement. If you have a particularly good rental history, your landlord may be willing to consider this.
· Finally, if your current home or neighborhood is not an ideal fit for you long-term, then look for rental houses in neighborhoods that are. Broach the idea of a rent-to-own structure with the landlord to make sure that they’re open to it.
FINAL THOUGHTS
A rent-to-own house can be a great option for people who are not quite ready to buy a home, or who want to try out a certain house before they purchase it. It is also helpful for people who have credit issues and cannot yet qualify for a mortgage. The disadvantage of rent-to-own is that the cost of the rent will be higher during the rent-to-own period, and the terms of the agreement will almost certainly require the services of a lawyer, an added cost. However, if you follow these tips, you should be able to start your journey. Have you ever purchased a house this way? What was your experience like?
YOU CAN ALSO READ: How to Start Your Real Estate Investment Journey
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