Deciding whether to rent or buy a home can be complicated. For some people, renting gives them more of a sense of freedom than the sense of ownership that comes with owning property. But others may feel they need more stability than renting provides, especially in an unemployment crisis or a severe shock that would affect their ability to make mortgage payments.

Real estate companies offer clients more than one option while searching for a home. The options available include renting, buying, or choosing a rent-to-own property. Rent-to-own properties can be an attractive option for people who don't have the money to buy their own home but are confident that they want to purchase a home in the future. By agreeing to rent a house and then buy it in the future, they will start making payments on the house and building equity over time while living in the space rent-free.

How Does Rent to Own Work?

Rent-to-own applies the principle of an option contract, which gives the renter the right to purchase a home instead of renting it. For example, if a renter were to make five monthly payments at $200 each, they would have $1,000 of equity in the house. This would be available for closing costs and down payment on the house if they exercised their option to buy as a buyer. The option fee will vary from seller to seller and is usually added to each rent payment.

Based on this option arrangement, the renter would have a predetermined time to decide whether to buy and, if so, within what time frame. In this case, the time frame would be five months. If they decided not to exercise the option, they would lose that $1,000 fee and continue renting the residence. Thus, the option fee is either a cost or an investment, depending on how the renter looks.

Advantages and Disadvantages of Rent to Own Housing

One of the most significant advantages of rent-to-own is that it offers people a sense of flexibility that may not be available through conventional renting or buying. For example, the renter can move out with only one month's notice if they decide not to purchase.

Another advantage involves the taxes on the rent-to-own home. The rent will be considered a tax deduction and the option fee as an investment. If the renter decides to purchase the property, the rent payments will count as income for three years and then as a capital gain afterward.

That said, there are some disadvantages to a rent-to-own arrangement. First, no rent control laws protect tenants in rent-to-own situations. Thus, if the renter decides to delay their decision and continue living in the property for an extended period, they may be faced with a significant increase in rent payments.

The disadvantages of rent-to-own properties are that many sellers may require up to a 30% cash down payment at closing and sometimes charge additional fees for early termination of the option or sale agreement.

Finding Rent to Own Housing

In deciding whether to buy a home, a renter should compare the monthly payment, the total cost of housing over time, and other potential housing expenses. Because of renting's flexibility, rent-to-own homes can be an attractive option for people in a temporary financial situation.

While it may not always be a good idea to rent out a property to someone to buy it later under a rent to own option contract, some specific rental agreements have proven to work very well for clients.

For example, if a renter were considering a rent-to-own option, they would ideally want to contact their local housing association and discuss potential deals. This can be an excellent way to determine whether rent-to-own houses work for clients because some housing associations have specific terms that must be met before the rental agreement is finalized.

Some housing associations will require that the property meets specific safety requirements before signing any agreement. Some will require that a certain amount of rent is collected monthly.

Conclusion

If one is interested in acquiring a rent-to-own property, they can ask their real estate agent to find a house in the area that will accept such an agreement. A real estate agent can provide potential options to clients interested in buying a rent-to-own home.

However, it is also essential for prospective buyers to try and understand the drawbacks of such a purchase before paying any option fees. They should consider how long they plan to stay in the property before deciding whether or not it will work for the long term.