In this example, Steve and Mary are very interested in a rent-to-own property and are curious how the math works. After meeting with the property owner, they are delighted to learn that the owner will give them a 24 month lease, which will give them enough time to accumulate their own down payment, get approved for their own mortgage, and buy her out. They agree the purchase price at the end of the lease will be $300,000, even if the appraised market price at that point in time is much higher! They also agree on a very attractive rental rate for the duration of the lease with no increases!
Steve and Mary have $5000 already saved and will sell a vehicle over the next couple of weeks in order to come up with another $4000. The owner has agreed to $9000 up front (no further security deposit required) and wants them to accumulate a further $8600 over their 24 month lease, which equates to a further $525/month on top of rent (this is called the Rental Premium). The logic is that $5000 plus $4000 plus the rental premiums (24x$525=$8600) accumulate to $17,600 in savings or about 5.9% of the purchase price. Both parties know that Steve and Mary will need at least 5% minimum down payment to get a CMHC-insured mortgage plus be able to to show another 1% or so for closing costs (lawyers, appraisers, property tax adjustments, etc,), so this payment arrangement will get them very close to this goal.
Every month, Steve and Mary agree to pay the property owner rent (say $1475) plus the rental premium ($525) for a total of $2000/month. They debate whether to write up the contract showing rent as $2000 with a $525 rebate towards down payment when they buy and pay with one cheque, or as two separate numbers with a cheque for each every month. Their mortgage broker has advised that in two years at mortgage approval time, they will have to prove how they accumulated their down payment. Knowing this well in advance, Mary decides it is easier to prove if they pay with two cheques and to keep all their monthly chequing account statements in a file ready at the asking.
In our example below, two years pass and Steve and Mary apply for a mortgage as planned. They are all smiles when the bank appraises the property value at $336,000, well above their $300K purchase price. Along with other documents that the bank wants to see, they present their chequing account statements and easily prove they have accumulated their down payment. The mortgage is approved and, with the help of their lawyer, the title of the property transfers into their own names to successfully complete the rent-to-own / lease-purchase transaction. Over the years, their property continues to increase in value and provides a solid foundation upon which they continue to build their financial future.
One last word: Rent-to-own is a stepping stone to a mortgage, not a replacement. You must understand what's involved in owning a house, maintaining a house, the financial obligations, and what it will take to get a mortgage to make this strategy successful. We recommend you download and read the following free guide: Homebuying Step by Step While the final purchase transaction will not involve a Realtor, the rest of the guide provides a solid foundation. It is also imperative to talk to a mortgage broker in advance to determine what it is going to take to get your own mortgage. We can help.
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