The property market is a fickle beast. Property values soar right until you want to sell, when predictably they plummet. If you have a property you want to sell, but aren’t willing or able to lower your asking price, rent to buy may be an option worth considering. It can turn a 5 per cent yielding property into a 7 per cent yield.
Rent to buy is how it sounds. Tenants put down a deposit, and pay slightly higher than market rent to gain equity in the property and have the option of buying it before the lease period expires, usually around five years.
Property owner benefits
The sale price of the property is established up-front, so you know exactly what to expect when the deal goes through. If the market drops in the meantime, the sale price is still fixed.
‘Rent to buy‘ schemes generally encourage great tenants who want to take care of the property because they might end up owning it, while charging above market rent gives them incentive to complete the transaction. You don’t have to lower your asking price, and in the meantime, someone else is helping to pay your mortgage, insurance, rates and property tax.
Buyer benefits
If tenants don’t have the deposit or monthly income to qualify for a mortgage, renting to buy gets them on the path to homeownership. By agreeing to the price up-front, if the market balloons the property’s price stays the same. (When selling in a rent to buy agreement, consult a lawyer and include a clause allowing for the price of the property to increase with the market).
The property owner will often still pay for maintenance and repairs, and tenants don’t need to worry about rates, mortgage or homeowner’s insurance. If they end up purchasing the property, the seller will often credit part of the rent back to them.
Rent to buy gives people the opportunity to test drive a property before making a serious financial commitment, and if they walk away they only lose the portion of the rent paid above market rate plus their deposit.
Rent to buy pitfalls
The premium rent improves your business’ cash flow and it’s a great way to sell without worrying about the agent’s commission. As the property owner you lose the tax benefits, as a ‘rent to own’ scheme is often charged as an active business, while any appreciation benefits are passed onto the tenants.
It’s also a lot of work to find the properties, buy and renovate them, only to sell them before you have reaped all the rewards. If you’re looking to quickly increase your cash flow, a rent to own agreement will fetch you more than a traditional tenancy. You can lock in a sale price if the bottom is dropping out of the market.
If you’re looking to slowly get out of the property investor market while still paying for your retirement, rent to buy plans may help you achieve that. Rent to buy agreements are useful tools to have in your property investor kit, but you’ll have your work cut out for you if you want to make it your business.
Download our A-Z guide is a handy guide to help you navigate the property investment world, and make buying, leasing, and selling homes that much easier:
