The rent to buy option is a great way to get started in property without a lot of help from the bank. Let’s say that you might not be in a position to afford a home loan or you might not have the best credit score. This might be a strategy for you to become a homeowner.
How it works
The rent to buy strategy is really allowing you to rent the property for an agreed period of time, plus some additional monthly payments. At the end of the set time that you’re going to be renting the property, you have the option to buy the property. It’s allowing you to buy some time. During this time that you’re renting the property, you have a chance to improve your credit score and show the bank that you can pay a monthly instalment to the landlord.
You could also save up for a deposit during this period of time. That deposit and record of instalments paid to the landlord are essentially about creating a business case to the bank to say, “I can deal with debt, I can handle paying a monthly instalment towards being a home owner and this is my proof.”
That’s why I say it’s a great way you can prove yourself worthy of a home loan over time, which is really what’s going to get you the financing to buy a property.
Is the rent to buy strategy for you?
If you’re someone who doesn’t necessarily capital upfront right now to purchase, you’re looking to purchase in the future and you’re able to commit to paying a monthly instalment (rent plus an additional amount) then this is an ideal strategy for you to become a homeowner.
You don’t need upfront capital. You don’t put a deposit down. You don’t have to pay your buying costs, your transfer fees, your bond registration costs. None of those costs are applicable. That gives you time to purchase in the future, because usually buying a property requires an upfront fee and it does require some additional monthly payments.
All you have to do is diligently pay your rent every month and a portion of your rent gets taken off the purchase price. You’re actually buying a piece of the property every single month until the end of the decided payment period.
Let me take you through an example.
Example of rent to buy purchase
Let’s say you’ve identified a property in a location that you’re looking at buying in. The first option I’m going to show you is buying the traditional way, which is with a bank loan.
First, have upfront fees. Those are your buying costs such as the deposit, property transfer fees and bond registration costs.
Let’s say you got this property for a million rand at the monthly bond. You would then go to the bank, put a deposit down and the bank would then charge you a monthly amount for 20 years to pay off the bond. In our example, that monthly bond is ten thousand rand.
Assume the total time to pay off the home loan is 20 years and then it becomes yours. Without a bond, the capital needed in total would be the million rand to buy the property plus the upfront fees.
Most people don’t have a million rand in cash. So, you would have to go to the bank. If you don’t have a good credit score, which essentially means you don’t have good affordability, this is the kind of option that the bank won’t even consider. But if you do want to look at the rent to buy alternative, you might be able to become a homeowner in a few years’ time.
The upfront fees of being a homeowner through rent to buy are a lot less than buying the property the traditional way. The only fees that you probably need to put up are the legal fees to put together a rent to buy agreement between you and the seller that stipulates that you’ll have so many years to rent the property and then you have the option to purchase it.
Continuing with our example, the agreed purchase price would still be a million rand for this property. Now, your monthly rental is going to be fifteen thousand rand. I’ve put a star there because that fifteen thousand rand includes your rent as if you were renting the property normally plus a portion of that goes towards buying the property. It might be that ten thousand rand goes towards your rent and the remaining five thousand rand is what you’re essentially paying to the owner over time to reduce the capital required to buy the property.
If the rent to buy agreement term is five years, the remaining payment after five years would be R700 000. It wouldn’t be a million because over the five years, you’re paying roughly about R300 000 rent in capital repayments. You’ve reduced the required payment for the property from a million rand to R700 000, which you can now go to the bank and get a loan for. It’ll be a lot easier to get a loan at R700 000 than at a million.
Your total capital needed is R720 000 as opposed to R1 050 000.
That is a quick and maybe an overly simplified example, but hopefully it helps you grasp the power of the rent to buy alternative and how you can use this to your advantage to become a homeowner at a later period of time.
If you are interested in exploring more, there are companies that now specialize in the rent to buy solution. But, as I always say, do your own homework as well. Please don’t just let them give you a property. You always need to do your own analysis on it.
So that’s the rent to buy solution. A great option for someone who doesn’t have upfront capital and is willing to become a property owner and investor in the future.