If you have heard of ‘rent to buy’ for houses, you may be wondering how it can work for individuals and how it affects anyone who owns a rent roll.
As Australia’s housing shortage continues, everyone from individuals through to Government officials is looking for affordable solutions.
‘Build more houses’ is the obvious solution to balance supply and demand. However, this takes a lot of time and there are still materials and labour shortages to deal with.
Schemes are popping up, like the NSW Government’s Shared Equity Home Buyer Helper. This allows eligible individuals to ‘co-buy’ a house with the government and have the option to buy back their share over time.
The other initiative is ‘rent to buy’. This can be a solution for people who have jobs but not enough of a deposit, or a situation where bad credit is preventing them from getting a home loan.
What is rent to buy for homeowners?
Similar to the way Radio Rentals works with appliances, a rent to buy scheme for houses allows buyers to lease a home then buy it for an agreed on amount once the lease has expired.
The process will generally work like this:
The buyer chooses a place and a rent to buy company buys it.
The buyer contributes a small deposit, which may or may not be put towards equity in the home.
The rent is an above market rate for the first few years, which helps to build equity.
After a few years, the buyer has the option to take out a home loan from the bank and purchase the home, usually for an amount agreed on in a contract signed at the beginning of the process.
Because the house has experienced capital gain, the bank will be more willing to provide a loan.
The risk of rent to buy is firstly if the buyer decides not to or is not able to purchase the home at the end of the agreement, which may mean they have lost their deposit and paid above-market rent, while potentially not making any money. They are also not officially the owner of the property while they are renting to buy, which can cause difficulties between stakeholders.
The advantage of rent to buy is being able to get into the market with a smaller deposit, and have a plan in place to own the home outright in the future, rather than renting and trying to save money. The cost the buyer pays will be locked in at the start, so if they purchase a house for $800,000 and it goes up in value to $1 million, they will still pay $800,000 for it when the agreement expires. Depending on the agreement, some of the rent may go towards covering the purchase price.
There is also another risk to keep in mind: circumstances may change and the buyer may not be approved at the end of the process.
Rent to buy and rent rolls
As a real estate agency or property manager, you can play a role in rent to buy schemes.
Often, entire buildings are offered under rent to buy, giving you an opportunity to provide services as a property manager for the units in the complex, or even expand to offer a strata management service.
You have the opportunity to set yourself up as a rent to buy property management specialist, sharing your knowledge of how the arrangement works and reaching out to the companies offering rent to buy solutions in your area. Keep in mind there will be regular turnaround because agreements will expire after a few years.
Because the renters have ownership of the property in their sights, it’s likely they will treat it like their own. This can give you the advantage of additional revenue without the stress. With this being said, you will need to have contracts and agreements in place to protect all stakeholders.
If you have renters who are struggling to find a buying solution, you may be able to suggest this as your solution to help them become homeowners.