With home prices in the Toronto real estate market continuing to rise, many people have been looking at alternative ways to reach their homeownership goals. There are many new and creative ways people have found to make their dream of homeownership a reality.
There is one option, that has been around for a long time and can still be viable for buyers – that is buying with a rent-to-own agreement. With a rent-to-own program, potential buyers can easily turn their existing rent payment into a down payment for a home.
While making a rent-to-own pr
Once you have saved enough to afford the down payment, you can mortgage the property and begin paying monthly mortgage payments instead of rent. Generally, you will agree on a contract length with the property owner which can last from one to five years.
Two kinds of rent-to-own agreements
There are generally two kinds of agreements used when setting up a rent-to-own plan. The first is a lease-option agreement. With a lease option, you lease the home for a period and retain the option to purchase once you have saved enough, though the purchase is not an obligation and you can decide against the purchase with little or no penalty.
In contrast is the lease-purchase agreement – you are obligated to purchase the home at the end of the leasing period or face penalties. The penalties in question will depend on the contract signed but can include a loss of deposit or accrued rent credit.
Is rent-to-own available in Toronto?
There are no laws in the City of Toronto or the province of Ontario that would prevent anyone from pursuing a rent-to-own purchase. However, the decision to put a home up for sale in this manner is ultimately up to the seller.
In Toronto, this can get complicated as it has been a very hot market. In such a market, it doesn’t really make sense for an owner to sell a rental that is providing them with cash flow through rental income. If they were to sell in this manner, there would need to be something more in it for them than what they could make by simply selling the property outright. For this reason, depending on the market conditions in the city, it may be hard to find a rent-to-own listing at any given time. If you do find something, you need to make sure to do your due diligence and figure out exactly why the landlord is selling this way.
May require a down payment
In some cases, it’s possible to enter into a rent-to-own agreement with no money down, however, most rent-to-own companies will want to know you are serious about buying and are financially responsible, so they will expect some level of down payment. This will usually be less than a traditional mortgage down payment – typically in the range of 5% or less of the purchase price.
Consider the property carefully
You should be aware of the property you are buying before you get into a rent-to-own agreement as you are essentially agreeing to buy property years in advance. Once you take ownership, all of the concerns such as maintenance will fall on you. If the building you rent is in poor shape now, it may not be worth buying it five years down the line when it has deteriorated further. You should also be aware of whether or not you are responsible for maintenance in the time before you take ownership as is the case with some rent-to-own plans. This can present a problem if you are already putting a significant amount of your money towards your monthly rent payment and need more money for maintenance.
Not a substitute for a mortgage
Once you save your down payment with a rent-to-own plan, you will still need to take out a mortgage for the home. Make sure that you will be financially stable enough to be approved when the time comes, otherwise, you may not be able to purchase the home you have been saving for and can face penalties depending on your contract.
Is it cheaper than buying?
Rent-to-own will generally not be cheaper than buying and can, in many cases, be more expensive. This is especially true if you lock into a price and the market shifts so you are buying for more than the home is even worth. This can go the other way too – you may end up buying for less than the home is worth. However, due to the consistent appreciation of home values in Toronto, this situation is less likely.
Furthermore, since you will still need to be approved for a mortgage after your rent-to-own lease has run its course, it does not offer you any particular benefits in terms of how much of a home you can afford. Depending on the agreement you reach for your rent-to-own scheme, there may be associated fees and costs involved that would not be paid in a traditional home sale.
Finally, if something goes wrong with your rent-to-own program and you are forced to move or not purchase the home, in some cases, you can lose out on a significant amount of money.
Overall, rent-to-own should not be seen as an outright cheaper way to buy a home. You should really decide if it’s right for you based on the other benefits of these types of purchases.
Is it a good investment?
Rent-to-own is not, strictly speaking, an investment at all. Eventually, you will have the right to purchase the property, and at that point, your home can be seen as an investment. However, until you actually take possession of the home, you are basically just building savings.
This means that while your money is held in a rent-to-own program, you are not able to invest it to grow elsewhere nor is it sheltered from factors like inflation. This means you could potentially save faster by simply doing it yourself and investing your money but you may be subject to investment risk and market fluctuation.
A rent-to-own home is a valid option for those who are looking to get into homeownership as soon as possible but may need some extra time to save or improve a bad credit score. It can make saving and achieving a down payment nearly effortless for those who have trouble saving.
However, rent-to-own programs also have their own limitations and are only one of many options to help homeowners achieve their goals. If you are in need of an alternative path to homeownership, be sure to carefully weigh your options and do your due diligence before you enter into a potentially costly and lengthy contract.