Working in real estate, it’s already a given that I would know the ins and outs of the industry. Unfortunately, a lot of people don’t. My job is to make sure people know their best options when looking for a place they can call home. And their options aren’t limited to deciding factors such as where they live or the number of bedrooms their place has. A part of my job is letting them know about places that meet their financing options.
I don’t just show my clients places they can buy. If they ask (or if I feel like buying a place isn’t an option for them at the moment), I offer to show them places they can rent or rent-to-own. The concept is fairly simple, and I think a lot of people understand what it means. But there are still some misconceptions on renting and rent-to-own models, and I’ve tried to explain these to my clients so that they best understand their options when investing their money on a place.
Buying a House
It’s simple: you buy a house on the market, you pay for it, and it’s yours. A simple concept, but much more complicated when you take in the buying process, the decision making, and the taxes and fees that come with owning a house.
The most important thing you have to remember about buying a house is that it’s not a temporary thing. Ideally, your house should last long enough for you, your children, and so on. If you feel like you won’t be staying in that place forever, it’s much better to just rent. However, take note that the expenses of buying a house are more than just for the house itself.
Expenses of Buying a House
Most people who buy houses or condominiums are people who want a place of their own, whether for themselves or for their growing families. Ideally, people buying homes should already have enough money saved, or at least a stable job that can help them get a good loan from a bank or any financing business. However, once they’ve paid off the house, homeowners will need to shoulder the following expenses.
First, they’ll have to pay property taxes every year. Second, if they bought their house through financing or if they want an added layer of protection on their investment, they have to pay for insurance premiums. A lot of banks require homeowners to have insurance on their property in case of accidents so that, in case of property damage, the insurance company can fund the repairs and restoration.
Third, homeowners will have to pay utilities. According to the Department of Energy, an average American family spends over $2,000 a year on utilities.
Renting a House
When you rent or lease a house, you’re not exactly buying it, nor is the house yours. Instead, you’re buying the right to use the property in a specific amount of time. That’s why, while you’re renting, you don’t have a right to paint or renovate the house without the landlord’s permission. It’s also why you need to develop a working relationship with your landlord, since they own the house and you’re technically living in their property.
The cost of renting is much less than buying a house, since all you pay for is rent, utilities, and sometimes renter’s insurance. You’ll also need to put a security deposit forward, which is the money the landlord holds until you move out. This serves as money they will use if you damage property or fail to pay your monthly rent.
I recommend renting if either you’re not yet financially ready to buy your own house, or if you’re going to be staying in a place temporarily and don’t want to be saddled with the responsibility of paying home expenses in the long-run or want to be burdened with selling the property once you’re leaving. I usually ask my clients to look ahead: if a house costs $200,000 but it rents at $1000 a month, I recommend just buying the house if they see themselves living in the house 20 years from now. Otherwise, it’s much more convenient to just rent.
Rent-to-Own / Leasing Option
Not a lot of people know or truly understand what a rent-to-own means. Let’s say that you’re not financially ready to buy a house, but you want to and you’ve found a place that you want to buy. The landlord offers you the option to “rent to own.” For an agreed amount of time – in this example, let’s say around five years – you’ll be living in the home and pay rent that is much higher than the regular rent rate.
Apart from the security deposit, you also have to pay an “option fee,” which is around three to seven percent of the house’s sale price. For the next five years, you have time to get a better job, seek financing, build a better credit score, and become more financially stable. Now, once these five years are almost over, you have the option to buy the house. Should you choose to buy the house, you’ll pay for the agreed sale price stated in your contract five years ago, not the house’s value after the time period. This is beneficial to you if the house’s value increased.
Because your rent was much higher in rent-to-own, the added rent rate serves as a down payment for your home. The rest of the payment, you can pay with financing or with saved money. Since you’ve “locked in” the house five years ago, the homeowner cannot rent out or sell to anyone else until you’ve made your decision or until the deadline is over.
However, it is only an option to buy the house. If, after five years, you decide you don’t want to spend your money on that home and want to buy a different home, you don’t have to buy it. The increased rent will be treated like normal rent and you move out as if you were simply renting. However, be careful when you sign the contract. If you sign a contract that says “lease option,” you have the option to not buy the house. If the contract says “lease purchase,” you will have to buy the property after your rent contract is done.
Choosing the Best Option
I would recommend buying a house only if a) you have the money for it; or b) if you have built a good credit score. People who think they have barely enough for a down payment and then plan to get a loan for the rest of they payments aren’t considering the other expenses of owning a house. I’ve seen a few young fresh graduates hopeful and bright get their new place all to themselves, only to desperately crowd their house with roommates just to make ends meet.
Despite what people say about renting, it’s still a practical choice if you want to do away with the added expenses. And renting to own, though sold at much higher rental rates, gives you the opportunity to lock in the house you want and gives you the chance to build up your financial stability.
One of the most important parts you have to consider when buying a home is your financial stability and whether or not you can afford to own or rent in the long run. Be sure to ask your real estate agent or broker for advice and find the most suitable option for your financial situation.
