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 principal 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 a rent-to-own home program can help home buyers that don’t already have a sizable down payment saved up, it doesn’t mean that buyers won’t need to make any down payment. Rent-to-own homes with no down payment are extremely rare, but they can be an option at some companies. For example, GVC Property Solutions in Vancouver allows rent-to-own homes with no down payment. Instead of an initial down payment upfront, you can gradually pay the down payment through installments during your rent-to-own term. Most rent-to-own companies in Canada require an initial down payment before you start renting the home. This is usually less than the minimum down payment for an insured mortgage, but can still add up to thousands of dollars. The initial down payment is sometimes called the initial option fee, or the initial option consideration. It’s used by the renter to purchase the option that gives them the ability to purchase the home later.
For example, MB Rent-2-Own, a rent-to-own company in Winnipeg, requires an initial down payment of just 2.5%. The goal over the rent-to-own term is to save enough for a combined 7% down payment, which will be enough to get a CMHC-insured mortgage which has a 5% down payment, less roughly 2% for closing costs. Instead of needing 5% upfront, this Winnipeg rent-to-own company only requires 2.5% upfront, letting you save money for the down payment over a longer period of time.
However, not all rent-to-own companies allow a low initial down payment. In these cases, these programs are better suited for home buyers that have enough savings but don’t have enough credit to qualify for a mortgage. They might have a bruised credit score or blemished employment history that they want to get fixed, but they also want to purchase a home now. These rent-to-own companies have a higher initial down payment requirement. For example, Fraser Valley Rent 2 Own, a rent-to-own company in British Columbia, usually requires an initial down payment of 5%, but it can be as low as 3.5% if the home buyer already has a good credit score. Canadian Property Solutions has an initial down payment requirement of 10%.
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 down payment 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.
If you use a local rent-to-own company, then you may be able to purchase homes anywhere that the company allows you to. They may also have their own catalogue of listings, which signifies that these are their investor’s properties, that may have a lower down payment requirement, or lower fees.
Most local rent-to-own companies only operate within a certain city or region. For example, a search for “rent-to-own homes near me” will give you results from local rent-to-own home companies. However, you aren’t limited to just rent-to-own homes in your local area. National rent-to-own companies operate throughout Canada.
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.
Income Requirement for Rent-to-Own Homes
The minimum income that rent-to-own companies require will depend on your mortgage affordability. The higher your income, the more you can borrow with a mortgage. Clover Properties, a rent-to-own company based in Ontario, has a general minimum income requirement of $50,000. Pumpkin Homes, a rent-to-own company in Barrie, Ontario, has a household income requirement of $75,000, with at least two years of employment.
You will generally need to be employed in order to qualify for a rent-to-own program, or your spouse or partner will need to be employed. If you have a steady employment history and can prove that you can comfortably afford your monthly rent-to-own payments, then you can generally be approved.
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.
Having a lower option fee, or initial down payment, will most likely result in higher monthly payments. That’s because you still need to make up a minimum down payment by the end of your rental term. Paying a larger initial down payment now will give you the ability to have lower monthly payments, as less will need to go towards your down payment savings.
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.
Most rent-to-own companies have an average contract length of three years. This gives just enough time for the renter to save up for a down payment, while not taking too long and tying up the home. However, the contract length can be longer or shorter depending on your finances. If you need more time, then a contract length of four years or even five years can be possible. If you don’t need a long term, then a length of one year or two years might be more suitable.
In any case, you can always purchase the home at any point during your contract term. However, this will generally be at your specified purchase price laid out in your rent-to-own agreement, which has a set amount of appreciation fixed in. By purchasing early, you will be paying this appreciation upfront.
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".
While the home’s purchase price might be set in stone in your rent-to-own contract, what is not fixed is the home’s market value. This makes it somewhat of a risk for a rent-to-own buyer, as they will need the home’s market value to at least appreciate to the purchase price of the home in order to not overpay for the home.
The future purchase price of a rent-to-own home is usually determined based on a set expected appreciation rate for your local market. For example, a certain rent-to-own company in Vancouver prices the appreciation as 3.5% to 4.5% per year. If a home is currently $500,000, this means that the rent-to-own purchase price after a 3-year term would be:
You will be paying over $70,000 more than the home’s current value, based on an expected price growth of 4.5% per year. If the value of the home increases more than your set purchase price, then the difference is yours to keep. Since the locked-in purchase price will most likely be higher than current home prices, this means in practice that buying a home through a rent-to-own home program will be the same as buying a home regularly on the market in the future for the same time period. However, some rent-to-own companies may factor in significant price appreciations, which will cause you to pay more. An important thing to consider when choosing a rent-to-own company is the markup, or price appreciation, that they will apply to come to a purchase price.
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.
The specific amount of your rent credits will depend on how much more you need to save in order to meet a mortgage lender’s minimum down payment requirements within your rental term. For example, let’s say that your home’s purchase price is $500,000, and your rent-to-own company requires a 2% initial down payment for a 3-year term. You’ll need at least a 5% down payment to get an insured mortgage. This means that you will need to save up another 3% of your home’s price over the next three years.
3% of $500,000 is $15,000. Divided over three years, this works out to roughly $416 per month. This amount is added on top of your monthly rent. Rent-to-own companies usually charge rent based on current market rental rates, with the minimum being at least enough to cover their monthly mortgage payments. For example, if Calgary’s average monthly rent was $1,000 but a mortgage for the property would cost $1,500 per month, then the rent-to-own company would charge at least $1,500 per month. The opposite is also true. If Winnipeg’s average monthly rent was $2,000 but a mortgage costs $1,500 per month, then the rent-to-own company would charge $2,000 monthly rent.
Combined with the rent credits portion, the total a rent-to-own participant would pay would be $2,416 per month, based on a $416 monthly rent credit amount. How is this paid? Typically, two cheques would be made out as payment every month. That’s because your rent payments need to be separate from your rent credit. This boils down to your down payment from the lender’s perspective. If the rent-to-own company collects the whole amount and simply deducts your rent credits from your home’s purchase price, then that means a discount was made from the price, not a down payment from you.
If the rent credits are separate from your monthly rent, then they can be saved up and “refunded” back to you when it is time to buy the home. Essentially, the rent credits are a way to force you to save up for an adequate down payment from your own resources. You’ll use your rent credits as down payment on the home yourself.
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.
Some rent-to-own companies liken this as treating the home as your actual home. The renter will eventually be buying the home, so they might as well be paying for the home’s upkeep and maintenance. However, you can be restricted from certain actions, such as renovating the home or even painting the walls of a room. You will need permission from the rent-to-own company in order to make changes or alterations to the home before you have actually purchased the home.
Besides maintenance and repairs, what else is a rent-to-owner responsible for? You will be responsible for regular costs of homeownership, which in turn are also costs for renters too. This includes utilities, such as electricity, water, gas, along with phone, internet, cable, and renter’s insurance.
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.
Some rent-to-own companies will refund a portion of your accumulated rent credits in certain cases. For example, if you’ve followed their credit repair program and tried your best to qualify for a mortgage, but were not approved, then they may decide to provide a partial refund. This can range from 25% back or more. However, if you have not been making an effort to get your financial situation in order and have been delinquent, then they might not offer any refund.
If you can’t purchase the home, the rent-to-own company might decide to work out an agreement, such as extending your rent-to-own term for another term, which will give you time to improve your credit and save for an even larger down payment. For regular home sellers that have entered into a rent-to-own agreement with a buyer, they might not even want the home back. That’s because the home seller entered into the agreement to sell the home, and not to become a temporary landlord for a few years. Entering into a rent-to-own agreement should be treated like the home is being purchased, with ownership just being delayed a few years.
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).
A rent-to-own agreement template will include many terms that have been agreed upon. The agreement will also outline your responsibilities. A typical rent-to-own agreement will contain at least the following items:
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 Ontario, with a particular focus on the GTA and surrounding regions. This includes Toronto, Mississauga, Brampton, Hamilton, Markham, Vaughan, Barrie, Kitchener, Peterborough, and more. They claim to have a 100% success rate with over 300 successful homeowners.
Requity Homes offers a modernized rent-to-own program to aspiring home buyers who aren't mortgage-ready today. They offer terms from two to five years and operate in Northern Ontario, including North Bay, Sudbury, Sault Ste. Marie and Thunder Bay. Requity Homes has since expanded to now operate in Saskatchewan and Alberta, specifically in the cities of Regina, Saskatoon, Calgary, and Edmonton. They also offer cash-out options for renter-buyers if their circumstance changes. For the rent-to-own program, Requity has a strict home price range of $150,000 to $600,000.
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.
Fraser Valley Rent 2 Own is a founding member and current diamond member of the Canadian Association of Rent to Own Professionals (CAROP). Fraser Valley Rent 2 Own is based in Abbotsford, B.C. with operations throughout the Fraser Valley and as far reaching as Kamloops and Prince George. Terms usually range from two to three years, with a down payment (option fee) of around 5%.
JAAG Properties is a rent-to-own company that operates throughout the province of Ontario. JAAG Properties helps new immigrants, self-employed, and those undergoing bankruptcy or divorce to get on the pathway towards homeownership, as well as help those who otherwise can’t qualify for a mortgage. Their average rent-to-own term is three years, but can range from 2 years to 4 years.
Apex Western Home’s Vancouver Rent-to-Own program has properties available across Vancouver and the Lower Mainland, with 3% to 5% needed as down-payment. There is also a $2,300 fee required to cover legal fees, property appraisal, and an inspection. The purchase agreement ranges from three to five years.
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 the largest RTO company in Canada, operates in all provinces and has been running its Rent to Own program since 2005. This makes HOS Financial the longest-running rent-to-own program in Canada! HOS has initiated 1,100 rent-to-own projects since 2005 with a 95% success rate.
Rent To Own House has completed deals across Ontario, including rent-to-own homes in Windsor, Hamilton, Brampton, Simcoe, and Niagara Falls. Rent to Own House offers a term length of three years.
Some rent-to-own companies and brokers in the GTA, including Toronto, Mississauga, and Brampton include:
|JAAG Properties Inc||Clover Properties|
|Rent to Own Canada||Say No to Rent|
|HOS Financial||Red Door Home Solutions|
|Rent-to-Own Solutions||Mortgage Architects (Lez Gomez)|
|iPro Realty (Bill Saini)||RE/MAX (Manoj Atri)|
|Rent To Own House|
|Sandstone Management||Home Purchase Solution|
|JAAG Properties Inc|
|JAAG Properties Inc||Simcoe County Property Management|
|The Trevor Shaw Team - RE/MAX Hallmark Chay Realty||The Shannon Murree Group / MovingSimcoe.com Team|
|Brian Fockler Barrie Real Estate Agent|
|JAAG Properties Inc||Sprout Properties|
|Rent Live Own Sudbury||Requity Homes|
|JAAG Properties Inc||Housecents Oshawa|
|Red Door Home Solutions|
|Rent-to-Own London and St. Thomas|
|JAAG Properties Inc||Casb Management Group - London, Ontario|
|Drewlo Holdings & The Ironstone Building Company|
|JAAG Properties Inc||I Buy Houses Fast Inc.|
|Uniqua Management Inc.||Home Purchase Solution|
|E&C Properties Inc.||NV Property Management|
|JAAG Properties Inc||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||Mortgage Architects (Canada Innovative Financial)|
|KW Elite Realty (Kelly Fry)|
|Belmont Living Rent to Own - Langford BC||Crossing at Belmont Rent to Own - Langford BC|
|Kelowna Rent To Own - Vantage West Realty Group|
|Fraser Valley Rent 2 Own||One Stop Home Buying Centre Inc.|
|Fraser Valley Rent 2 Own|
|EQ8 Lease to Own Program||RTO MONTRÉAL|
|Breneka Solutions - Solutions Immobilières Breneka|
|MB Rent 2 Own||Square Foot Properties Winnipeg|
|Crest Holdings Inc Winnipeg||HomeStreet Inc RTO Winnipeg|
|Blair's Real Estate Solutions - Blair Zilkey Team||Braveya Homes Saskatoon|
|Westbow Construction Saskatoon|
|Kodiak Property Management||KD Properties|
|Leenan Properties Regina||Don Rosom - I Buy Houses Regina|
|Equimax Rental & Property Management|
|Home Visions Canada||ASAP Housing Solutions|
|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|
CAROP is a professional association that represents the rent-to-own industry in Canada. In order to become a member, rent-to-own operators must pass an application process that includes a review of their operations. CAROP members are required to meet specific eligibility criteria and must adhere to the CAROP Code of Conduct. This code includes a commitment to working in the client's best interest, having training in rent-to-own operations, and having a credit coaching component in their rent-to-own program.
While rent-to-own companies in Canada are not required to be a CAROP member, choosing a CAROP member for your rent-to-own home ensures a certain level of service and professionalism. This will give you peace of mind knowing that you're working with a reliable and trustworthy business.