What are the pros and cons of rent to own?

Are you thinking about entering a rent-to-own contract with your landlord?

It can be a somewhat confusing concept, but the gist isn't different from renting to own furniture or appliances.  

But you're probably hesitant -- and rightfully so -- about entering into a rent-to-own agreement when you're buying a house. That is, after all, a much bigger purchase than a refrigerator or a couch.

In this article, we'll look at the pros and cons of rent-to-own real estate agreements so that you can make an informed decision.

Pros and Cons of Rent to Own

When you want a mortgage, the bank needs to see a history of loans that you've repaid. They can't lend a $100k mortgage out to everyone who asks for one.

So they crunch the numbers on all of the different factors regarding those loans. They look at how long it took you to repay the loan, how much money the loan was for, and the different types of loans (credit card, car, student loans, etc.).

Naturally, this can make it pretty hard to secure a traditional mortgage. Everyone goes through some financial hardship in life. Sometimes that means that your credit has taken a big hit, and because of that, the bank won't let you buy a house without building up your credit score -- which can take years.

When you enter a rent-to-own contract, you don't need to have an excellent credit score -- or any credit score at all. You're making payments to your landlord, not the bank.

Low (or No) Down Payment

Furthermore, the bank requires you to put a large sum of money down to secure a home loan in the first place.

That can make it even harder to purchase a house. As we saw with the recent pandemic, most American families don't even have enough money in savings to cover a $400 emergency. Homeownership is becoming a distant dream for many Americans today.

With a rent-to-own agreement, though, you often don't need any down payment at all. Suppose you can prove to your landlord that you can make the payments (typically slightly higher than the typical rent payment). In that case, your landlord will often count a certain fraction of those payments toward your "down payment" when you decide to purchase the house.

Cons of Rent to Own

  • More Expensive Than Renting

Most of the time, when you're entering a rent-to-own agreement, your monthly payment is going to go up.

Rent-to-own makes sense, after all. You're no longer "renting," in the strictest sense of the word. Instead, depending on the contract, you're building up equity in the house. When you finally purchase the home, some of those extra rent payments will go towards ownership.

For example, let's say you're renting your current place for $1,250/month. If you want to enter a rent-to-own contract, your monthly payment might go up to $1,750/month for twelve months. After that period is up, you might have the option of purchasing the house. In that case, the extra $500/month usually contributes to your down payment, so you'll already own $6k worth of the home.

However, contracts vary, so make sure you review precisely how that's going to work with your landlord.

You're On the Hook for Repairs

Your landlord needs to know that you're willing and able to take good care of the property. If a pipe bursts or a gutter falls, you're often contractually obligated to make repairs. That means that regular maintenance now falls on you.

However, this isn't that different from homeownership. When you own a home, you'll often have to make repairs -- some minor and some major. That's just how it goes.

The problem is that when you're in a rent-to-own agreement, you don't necessarily own the house yet. So, when you make expensive repairs that increase the home's value, you don't necessarily reap the rewards of those repairs. You might choose not to buy the house at all, even after you've fixed a part of it up.

Conclusion: Pros and Cons of Rent to Own

What are the pros and cons of rent to own?

Well, when it comes to the pros, you don't have to have a credit score or a down payment -- and yet you still get the option of buying your own home. You don't have to work with traditional lenders; you have to work with your landlord. You might have thought that the bank would never give you a mortgage, but with rent to own, you can still fulfill your dream of owning your own house.

As for the cons, your monthly payment will probably go up, and you're still on the hook for repairs. At the end of the agreement, you might change your mind about buying, and that means you'll likely forfeit all of those repairs and extra payments.