Research has shown that many Canadians understand that homeownership is the best investment. However, a combination of higher home prices, rising interest rates, and above-trend inflation has made it difficult for many households to purchase a single-family house, a townhome, or a condominium suite.
According to the latest estimates from the Canadian Real Estate Association (CREA), the average sales price for a home in the nation’s real estate market is around $700,000. Additionally, Canada Mortgage and Housing Corporation (CMHC) data show that the conventional five-year fixed-rate mortgage is still about six per cent. With the annual inflation rate running close to three per cent, the cost of living is immense.
This has many families, especially younger Canadians, exploring alternative ways to buy a home.
Earlier this year, a RE/MAX Canada survey found that 13 per cent of current homeowners used non-traditional measures to purchase their homes. In addition, nearly one-third (32 per cent) are pursuing unconventional ways of getting their feet in the housing industry. Close to half (48 per cent) say they would think about non-traditional forms of homeownership.
“Canadians from coast to coast are grappling with affordability challenges, but at the same time, their desire to achieve home ownership remains strong,” said Christopher Alexander, the president of RE/MAX Canada, in the report. “This is prompting many to seriously consider alternative ways to get their foot in the door, where it might not be feasible under the traditional ownership model of a single person or couple purchasing with between five and 20 per cent down.”
Over the past year, one method has garnered traction: rent-to-own.
What is it, and how do you take advantage of this tactic?
How Does Rent to Own Work?
So, first, what is rent-to-own? The concept involves establishing an agreement with a rent-to-own firm or a landlord and dedicating a percentage of your monthly rent toward a down payment on the home. As time goes by, the down payment accumulates, and the tenant can purchase the property from the housing provider.
Indeed, these rent-to-own arrangements can lay the groundwork for homeownership, providing a non-traditional opportunity for many families who might not qualify for conventional mortgages due to a lack of down payment savings or other challenges. At the same time, it is crucial to understand what rent-to-own deals involve and how to avoid the noise and be successful in this endeavour.
How to Succeed with a Rent-To-Own Deal
Here’s a comprehensive guide on how to succeed with a rent-to-own deal in today’s Canadian real estate market.
- Review the Contract Terms
Like any other notable housing development in your life, it is vital to conduct in-depth research on the terms and conditions detailed in the rent-to-own agreement. What should you look for exactly? Here is a brief list you should consider:
- Rent amount
- Purchase price
- Maintenance fees
- Penalties
- Option fees
- Research Housing Market Conditions
How is your local real estate market performing nowadays? Are home prices coming down? Is housing stock extremely limited? Is the resale market cheaper than newly built homes? Ultimately, it is about determining market dynamics and assessing if the terms outlined in the rent-to-own contract are worthwhile and match your long-term objectives.
These facets of the rent-to-own deal are the primary components to understand, which can be accomplished with a real estate attorney or housing advisor.
- Is It Affordable?
While housing affordability is deteriorating in the Canadian real estate market, you need to find out if rent-to-own arrangements can mitigate these concerns. Whether working with a real estate agent or a financial advisor, you will need to crunch the numbers, calculate your budget, and comb through the details to determine if rent-to-own is an affordable alternative to the conventional route.
- Negotiation
Although it might depend on whether you are engaging in a corporate entity regarding the rent-to-own program, you may be able to successfully negotiate better terms and conditions with a smaller firm or private landlord. Whatever the case, you can always try to negotiate various aspects of the deal, such as lease duration, monthly rent credits, option fees, and the allocation of maintenance responsibilities. Both sides of the arrangement will attempt to strike a delicate balance.
- Save for a Down Payment
No matter what happens with this rent-to-own deal, it is vital to still put money aside for a down payment should you choose to abandon the agreement. By doing this, you are not putting all your eggs in one basket and can keep all of your options open until you are 100 per cent certain what you will be doing.
- Treat the Home with Care
Once again, if you do not intend to stay at this home, you still need to treat it as your own. You want the home in good condition throughout the leasing period. Whether repairs are needed or any maintenance factors need to be addressed, it is always best to demonstrate responsibility and cooperation. Additionally, should you proceed with the deal, by keeping the home in good shape, you will benefit in the future through value appreciation.
H2 How Common Is Rent-to-Own?
The RE/MAX survey revealed that rent-to-own models are the most popular paths for non-traditional home purchases, with 22 per cent of respondents selecting this route to buy a property. Many housing markets, like Charlottetown and PEI, have witnessed upticks in things like rent-to-own or co-ownership/co-equity.
In the end, by learning about the basics of rent-to-own agreements and keeping up with market trends, you can bolster the odds of buying a home while building family dreams and equity for a comfortable retirement.
