Most apartment renters aren't in the right financial situation to buy a home, but that doesn't mean they can't dream. Other renters either prefer to move around every now and then depending on their situation, while some are simply planning to buy at some point down the line when things improve for them with regard to finances.
Have you ever considered a rent-to-own condominium arrangement? Yes, it's a thing, and some renters are opting for this path because of its less intensive financial requirements and the opportunity to own a few years down the line. Here are some pointers to determine whether or not a rent-to-own situation is right for you.
Why Rent-to-Own?
If you admit it, renting isn't the most financially savvy way of living. While it offers flexibility and relatively low property maintenance (most of iat's in the hands of the landlord), nothing you spend on rent goes into equity. A rent-to-own arrangement could change all that. That's where ‘rent-to-own condos' or ‘rental-purchase' agreements could provide a more permanent, equity-rich situation.
If your credit is less-than-perfect or you just don't have the finances to put down 20% on a home, this could work well for you. The arrangement could put you in the position to buy the condo you plan on renting, and you could be ready to get approved for a bona fide mortgage within as little as two years, at which point you would start earning equity and become a homeowner instead of a renter.
How It Works
When you sign for a rent-to-own condo, it involves what's known as a rental-to-own agreement or contract between two parties. There is a pre-determined time period which the renter will pay the owner (usually 3 to 4 years), as well as an one-time option to purchase payment (as opposed to a requirement). So, what does that option cost? It's usually about 3% of the full purchase price of the condo, but it could be less or more, so makes sure to know exactly what the amount is. If the condo is priced at $250,000, that means 3% would come to $7,500.
Pay attention to the language in the contract because they can vary from state-to-state or owner-to-owner. Make sure you read the fine print so you're not locked into a purchase agreement (unless you want to be). Once you meet the payment requirements (make sure you're on time, and it's best to auto-pay your rent), you can pay the option fee and apply for a mortgage that shows your regular payment history.
What Happens to Your Rent Payments?
If you're wondering how the funds flow, a specific percentage of the rental payments during the pre-purchase period get allocated to the purchase price. This is what's known as rent credit, and it amounts to approximately 25% of the monthly rental amount. If your rent is $1,500, then that would mean your rent credit comes to $375/month.
If you think that doesn't sound like much, that comes to $375 x 48 months (on a four-year lease) for a total of $18,000 of rent credit. That amount would go toward the $250,000 purchase price in our previous example. So, the remaining amount would come to $232,000 plus interest and related fees and closing costs.
Related Rent-to-Own Responsibilities
Your contract may stipulate that you need to do certain things during your lease period. It may involve condo maintenance to ensure the property is properly cared for, and this may mean you take on some responsibilities that would typically fall on the landlord. You will also need to budget for costs not found in straight-up rental-only leases. Paying for homeowners' association costs, property taxes (this could be significant, depending on where the property is located, as well as the square footage), and homeowners' insurance, and even renters insurance.
Make sure you read carefully and know what the potential costs are up front. If you plan carefully, it could all work out, or you might find that the total costs are well beyond your budget and a straight rental arrangement. Don't get ahead of yourself but do the research before you sign anything.
Is Rent-to-Own Right For You?
We've covered the details of rent-to-own arrangements, but you have to evaluate your own situation and plans carefully to know if it's the right situation for you and your family. Sure, it provides another route to home ownership, but the time frame or costs might not work for you. It's wise to look at your budget, plans for the future, and what the area to which you want to move might look like over the next few years. Talk to neighbors, do research online, and figure out if it's the best choice for you.
