Buying a home could be your fantasy come true or a nightmare depending on how you plan for it and how you manage your finances. It’s no doubt a huge investment – if you prudently select your financing options. The recently re-emerging home buying strategy seems to be the one that was prevalent in the 1990’s also widely known as the rent – to – own strategy. It is a successfully tested win – win way of making that investment in the real estate market that you always wanted.
The rent – to – own was almost extinct for the past couple of decades due to the relaxed lending environment where mortgage was easy. In today’s date and time, it is re-emerging as a popular home buying strategy due to the tightening of the lending policies.
There are two specific parts to this strategy:
2. OPTION FOR THE TENANT TO PURCHASE
In this case, generally a tenant is someone who wishes to purchase, but is unable to do so due to the lack of capital or credit to make a down payment. The investor generally has the down payment and wishes to make a fixed deposit on the property after a certain period of time.
Perfect candidates for Rent – To – Own
The investors that wish to work with the rent – to – own strategy generally work with tenants who qualify at the bank for a mortgage. These tenants have been usually turned down by the CMHC. The other lot best suited for such a deal are the ones who are new to Canada and do not have an established Canadian credit. Some tenants already own a house on mortgage and are hence not eligible for two mortgages at a time. Those who have recently started a new job and do not have an established employment record also find this strategy a great boon. The other category that are highly drawn towards the rent – to – own strategy are those who are self employed and do not have enough proof to support their income.
So, how does it work?
Investors who own a home find tenants and agree on a future price of the property. This is generally for a specific period of time say – 3 to 5 years. All this is estimated taking into consideration the current market rates and the likely price appreciation within that period of time. It’s typical to see a three percent increase per year. If the market is not so good, the buyer is stuck with the agreed upon price. They also have an option to walk away and lose the deposit. If the market skyrockets, the investor still receives only the agreed upon price putting him at a loss.
A monthly rent is calculated that includes the principle, interest and tax etc. and the option payment. The tenant also pays all the repairs and maintenance costs that may arise. At the end of the term, if the tenant decides not to purchase the house, the investor keeps the option payment. That’s how it works!
It’s however a good idea to consult with experts before any deal is made!
Tanvir Khera, is a full-time Vancouver Realtor® & Specializes in selling or buying a home in Lower Mainland, Tri-Cities, Fraser Valley and, as well as condos in Downtown Vancouver.