Renting a house means that you will be paying rent with nothing to show for it once your lease is over. But what if you want to own a home in the future, but cannot afford to purchase one today? Rent-to-own programs allow you to rent a home with the option to purchase it in the future.
Rent-to-own is an agreement that you will enter into with either your landlord or a rent-to-own company. You will be renting a home from your landlord or your rent-to-own company, with a portion of your rent going towards an eventual down payment on the purchase of the home. This is known as a “rent credit”. You will have the right to purchase the property either during your lease or once your lease expires, however you are not forced to purchase. This can range from one year to five years. Should you choose not to purchase the home, you will lose the rent credit that you have built up.
A rent-to-own agreement bounds your landlord to selling the home to you. Your landlord cannot sell the home to anyone else during the option period of your agreement. The option period is the time during which you have the option to purchase the home.
Renting to own a home involves two sets of contracts: a rental agreement and a rent-to-own agreement. Rent-to-own differs from regular rentals due to the addition of a rent-to-own agreement, which can be either a lease-option agreement or a lease-purchase agreement.
Whether you sign a lease-option or lease-purchase agreement, an agreed-upon portion of your monthly rent payments will be accumulated to be eventually applied towards the principle of the house. These are known as rent credits. You will lose the rent credits that you have paid if you do not purchase the home. Your agreement will also set out terms such as the purchase price of the home.
Rent-to-own homes are a good choice for renters who know that they want to save up to purchase a home, and do not want their rent payments to go to waste. It might be because the renter isn't able to afford the home at the moment, but after a few years they expect to have saved enough to afford a home. It might also be because they have a poor credit score or a low income, which will make it more likely that they will be declined for a mortgage.
Rent-to-own gives renters the opportunity to build up their savings, both directly through rent credits which will eventually be applied towards the home purchase, but also indirectly through more time. Making regular on-time rent payments will also help to increase renter’s credit scores and help them to have a required credit score to get a mortgage. This may increase the likelihood of approval for a mortgage, or access to more favourable mortgage rates. You can also use a rent vs. buy calculator to see which one is better suited for your financial situation.
Rent-to-own does have restrictions compared to purchasing a home outright. The property is still owned by the landlord, which means that you will have to follow the rules that the landlord has. Violating your lease, such as having pets when your landlord does not allow pets, might mean that your right to purchase agreement will become null and void, meaning that you will lose your option fee and rent credits deposit.
While you might be able to negotiate a rent-to-own agreement for properties that are currently being rented, you can also rent-to-own homes that are currently listed for sale. A homeowner looking to sell their house might be open to a rent-to-own option since it will allow them to earn rental income or to lock-in a higher home selling price in a rent-to-own contract.
Some rent-to-own companies allow you to choose any home on the market that you wish to rent-to-own. These rent-to-own companies will limit you to a certain home price and downpayment that you are eligible for. You can then select a home listed on the market within those limits that the company will then purchase, which you will then rent-to-own.
While a rent to purchase agreement gives you the option to purchase the home, it does not guarantee that the home would be purchased by you. Rent credits that you will receive will most likely not cover the purchase price of the home. You will need to obtain and afford a mortgage to purchase the home. Failure to obtain a mortgage within the option period will mean that you will lose your option fee and your rent credits.
Lease-option contracts or rent to purchase agreements give you the right, but not the obligation, to purchase the property. Depending on your contract, you might be legally obligated to purchase the home. Lease-purchase contracts, or lease purchase agreements, require you to purchase the home. You may face legal issues if you cannot purchase the home, such as if you were declined for a mortgage for the home.
If you choose not to buy a rent-to-home own, you will lose your option fee deposit and your rent credits. Just like when any ordinary lease agreement expires, you will simply move out of the home as usual.
There are important elements in an option to purchase agreement for you to consider. The first is the Option Fee, which is an upfront and nonrefundable fee that you will pay in exchange for the option to purchase the home in the future. This fee is nonrefundable, which means that you will not be able to get this fee back even if you do not purchase the home. You can also forfeit this fee if you default on your rent payments or break a term of your lease.
You can usually negotiate the option fee, which can range between 1% to 5% of the purchase price of the home. If you do exercise the option to purchase the home, the amount of the option fee can be applied against the price of the home. In other words, you can consider the option fee as a non-refundable deposit made towards the home.
Your rent to purchase agreement will have a set period of time that it is valid for, as otherwise your option would be valid indefinitely. This is known as the option period. Usually, this can range from one year to five years. During this time, the renter can exercise their option to buy the home. After the option period, the renter loses their option, and they will forfeit their paid option fee. Instead of a period of time where you can purchase, your agreement might specify a certain date that you must purchase on.
A purchase price for the home might be negotiated in advance, such as the current value of the property, or the purchase price can be the value of the home when the option is exercised.
For longer option periods, such as five years, the purchase price will usually be determined based on the value at the time the option is exercised, rather than set when the contract is signed, as home values can significantly change. If you do decide to lock in the home's purchase price when signing your rental contract, the agreed home value may be significantly higher than current market values.
The purchase price of a rent-to-own home is reduced by "rent credits".
A percentage of your monthly rent payments will be set aside, known as rent credits. This percentage can vary. For example, if the agreed upon credit percentage was 25%, then 25% of your monthly rent payments will be turned into rent credits.
These rent credits will be placed into a separate escrow account by your landlord or rent-to-own company. The rent credits will either be refunded to you when you purchase the home or applied towards the price of the home as a reduction. In either case, your rent credits will be applied towards the agreed-upon price of the home, making the home cheaper than it would otherwise be.
However, not purchasing the home will mean that you will lose your rent credits.
Usually when renting, your landlord will be responsible for maintenance and repairs to the property. However, responsibilities may vary depending on your contract. While you might be responsible for mowing the lawn or snow removal, you might not be responsible for things like a damaged roof while you are renting. You may even be responsible for all repair expenses.
Let’s say that you found a home listed on the market for $500,000 that you would like to purchase, but you were declined at a bank for a mortgage. You still want to purchase the home, so you enter into a rent-to-own agreement with a rent-to-own company.
The rent-to-own (RTO) company sends you two agreements, a lease agreement for a term of three years, and an option to purchase agreement (lease-option) which will set a home price and rent credits rate.
The option fee charged by the RTO company, which is an initial upfront deposit, is 2%. This would be $10,000.
You decide that you want to lock-in the purchase price of the home. The RTO company predicts that home prices will increase in the future, so they will add 3% per year from the price of the home today. This will result in a locked-in home price of $546,363 ($500,000 x 1.03 x 1.03 x 1.03).
Since the minimum down payment required for a mortgage in Canada is 5%, you would need to make a down payment of at least $27,318 ($546,363 * 5%). Your option fee deposit of $10,000 is applied, which means you will need to make an additional payment of $17,318 ($27,318 - $10,000) after three years.
This $17,318 will be spread out over the three years through rent credits, which is about $481 per month. This is added to your rent payments.
If the market price for a rental for a comparable home is $1,500 per month, you can expect your monthly rent payments to be around $1,981 ($1,500 + $481) per month.
If you purchase the home, you will be buying it at a locked price of $546,363. You will receive $17,318 in rent credits and your $10,000 option fee to be used against the home price.
If you do qualify for a mortgage, your mortgage would be for $519,045.
If you choose not to purchase the home, you will lose your option fee and the rent credits that you have paid towards. In the above example, house prices have also increased, which means any house that you purchase now will be more expensive then if you had purchased it earlier.
If home prices change more or less than the expected change in your agreement, it will impact whether purchasing or not purchasing would be a better choice.
If home prices increase more than the rate that you locked-in, then purchasing the home would allow you to gain that appreciation in price.
If home prices decrease, your locked-in price would be more expensive. At a certain point, it can be better to not purchase the home.
In the above example, the locked-in home price was $546,363 due to a 3% price growth per year. The total cost of the rent-to-own options was $27,318.
If the home price increases, such as to $570,000 rather than to $546,363, then you would be making an additional $23,637 ($570,000-$546,363). It would be better to go through with the purchase rather than to not purchase.
|Purchasing the Home||Not Purchasing the Home|
|Locked-in Purchase Price||$546,363||$546,363|
|Future Home Price||$570,000||$570,000|
|Impact Due to Prices||+$23,637||-$23,637|
|Cost of Rent-to-Own Options||-||-$27,318|
If the home price decreases, such as to $530,000, then you would be paying an additional $16,363. If home prices decrease significantly, such as to $500,000, then you would ‘lose’ an additional $46,363 if you purchase.
If you decide not to purchase, you will lose the $27,318 that you paid from the agreement, but save $46,363 from an inflated locked-in purchase price. This would make you $19,045 ahead if you decide not to purchase.
|Purchasing the Home||Not Purchasing the Home|
|Locked-in Purchase Price||$546,363||$546,363|
|Future Home Price||$500,000||$500,000|
|Impact Due to Prices||-$46,363||+$46,363|
|Cost of Rent-to-Own Options||-||-$27,318|
While you would still lose $19,045 from not purchasing the home over just renting the home over the same time period, you would lose $46,363 if you choose to purchase the home. In this case, it would be better to not purchase the home.
The break-even point is if the price of the home in the future is around the locked-in purchase price minus the total cost of the rent-to-own options (option fee plus rent credits).
There are rent-to-own properties across Canada, including many in rent-to-own homes in Ontario, British Columbia, Alberta, and Quebec. Finding a rent-to-own home near me can be as simple as contacting a landlord for a property that you are interested in and negotiating a rent-to-own agreement. Rent-to-own homes in expensive cities such as Toronto, Vancouver, and Mississauga can help make it easier for first time homebuyers to purchase a home.
There are many companies that specialize in rent-to-own properties. A rent-to-own company allows you to select a home that you wish to purchase, can help fix your credit score, and will help you qualify for a mortgage at the end of your mortgage term.
R&R Financial (Rent-to-Own Homes GTA) allows you to choose any property that is currently listed for sale within a certain approved amount. Your monthly rent payment is fixed, and the price of the home is also fixed. Terms can range from 2 years to 4 years. 15% to 25% of your monthly rent payments will go towards your home as a rent credit.
To qualify, R&R Financial requires a 5% down payment (option fee) and a household income of at least $80,000. R&R Financial operates in the GTA, including Toronto, Mississauga, Brampton, Hamilton, Markham, Vaughan.
Rent-to-Own Canada (RTOC) offers terms from two to three years, and even allows you to renovate your home while you are renting. You can buy the home before the end of the lease. RTOC operates in Toronto, Mississauga, Brampton, Ottawa, Calgary, Edmonton, Vancouver, Halifax, and Winnipeg.
Clover Properties promises that your monthly rent payments are fixed throughout your rent to own term, and that your future home purchase price is also fixed. Their goal is for your rent credits to accumulate to 10% of the purchase price of the home to help you build a suitable down payment. They also do not require any upfront down payment. Instead, they will purchase your selected home first, and then require your down payment (option fee) within five days.
Clover Properties operates throughout Ontario, including the GTA, London, Kitchener, Ottawa, St. Thomas, Sault Ste. Marie, Brockville, Kingston, Oshawa, and Niagara.
Apex Western Home’s Vancouver Rent-to-Own program has properties available across Vancouver, with 3% to 5% needed as down-payment. There is also a $2,300 fee requires to cover legal fees, property appraisal, and an inspection. The purchase agreement ranges from three to five years.
BC Rent-to-Own operates in the Okanagan in British Columbia, including Lake County, Vernon, Armstrong, Salmon Arm, Lumby, North Okanagan, and South Okanagan.
GVC Property Solutions operates in Vancouver, the Lower Mainland, and the Fraser Valley of British Columbia. Their rent-to-own terms are usually two years.
Home Visions Canada operates in Alberta, namely Calgary, Airdrie, Red Deer County, Lacombe, Okotoks, and Edmonton, with terms from 1 to 3 years.
HOS Financial operates in Montreal, Quebec, and lets you choose your own property.
Some rent-to-own companies and brokers in the GTA, including Toronto, Mississauga, and Brampton include:
|Clover Properties||Rent to Own Canada|
|Say No to Rent||HOS Financial|
|Red Door Home Solutions||Housecents|
|Mortgage Architects (Lez Gomez)||iPro Realty (Bill Saini)|
|RE/MAX (Manoj Atri)|
|I Buy Houses Fast Inc.||Uniqua Management Inc.|
|Home Purchase Solution||E&C Properties Inc.|
|NV Property Management|
|REICO||Ottawa-Gatineau Rentals Inc.|
|The Rent to Own Team||Exit Realty Matrix (Roch St-Georges)|
|Vancouver Rent to Own||GVC Property Solutions|
|Bridgewell Real Estate Group||BC Rent to Own|
|Mortgage Architects (Canada Innovative Financial)||KW Elite Realty (Kelly Fry)|
|Fraser Valley Rent to Own||One Stop Home Buying Centre Inc.|
|Home Visions Canada||Empire Citi Properties|
|ASAP Housing Solutions||JAAG Properties|
|Peak Housing Solutions||Real Suite Assets Inc.|
|Homeowners Now Inc.|
|Lincolnberg Master Builder||Essential Rent-to-Own Properties|
|911Homes||Sunrise Home Buyers|
|QD Home Quest||Bridge to Homeownership|