Rent-to-buy is one approach to purchasing a home. Is it the right one?
If the American dream is truly to own a home, it’s one still unrealized for 104 million residents.
There are some 43 million American households in rented homes, according to the National Multifamily Housing Council. Those renting represent 33 percent of the country’s population.
“Most people do own a home at some point in their lives,” says Nina Seckel Israel, a realtor with Weichert Realtors in Philadelphia. “But many people cannot buy because of bad credit, because they don’t have a steady income to qualify for a mortgage or because they don’t have enough money for closing costs, even if they could make the monthly payments.”
The number of renters in America has changed, and not just from the housing bubble, says Jim Lapides, vice president of strategic communications for the National Multifamily Housing Council in Washington, D.C.
In the five years ending in 2013, the number of renters nationwide was up by 4.2 million while the number of homeowners was down by 900,000. The council’s data shows that even 10 years ago there were 8 million new renter households and just 500,000 new owner households.
“The growth in renter households precedes the housing crisis,” he notes.
“The makeup of our country is changing to those that are more likely to rent,” he adds. “Single-person households, single-parent households and roommates collectively account for 53 percent of all households, and these households are more likely to rent.”
Another 80 million echo boomers are beginning to enter the housing market, primarily as renters.
In Philadelphia renter-occupied homes increased from 1.4 million in 2008 to 1.7 million in 2013, according to council data. In many ways, the city is mirroring what’s happening across the country, Lapides says: “The biggest demographic drivers of buying a home — marriage with children — only represents 20 percent of the population nationwide. In addition, as the 80 million millennials find jobs and begin moving out of their parents’ basements, they’re much more likely to rent than buy as they start out. Similarly, a portion of the 77 million baby boomers will downsize.”
He points to immigration as a huge driver of rental demand, as well as the resurgence of metropolitan urban cores. “People want to be where the action is, and apartments make that option available for many,” he says. “I also think that many see the value in the flexibility and mobility renting provides.”
Herein lies a few of the key advantages to being a renter. Any homeowner will tell you the same truth: when you own a home, you’re constantly reaching into your wallet for repairs, updates and renovations, some cosmetic and others direly needed. Every home requires large quantities of TLC that is often unpredictably expensive.
Added to your monthly mortgage payment, these unforeseen expenses can strain the monthly budget and add tension to home life.
For the renter, there’s the comfort of knowing all those headaches are a landlord’s problem. The faucet breaks? No problem. The landlord will send someone to fix it or deal with the damp consequences. The dryer has packed up? Again, it’s someone else’s responsibility to get it fixed or replace it.
Then again, if the landlord is not forthcoming, life can get complicated. “Many landlords restrict tenants from smoking or owning a pet,” Seckel Israel cautions. “As a tenant, you’re at the landlord’s mercy to some extent. You don’t know how much your rent will increase and if the property is sold you may need to vacate.”
There are times when it makes sense to rent, though, she adds. If you’ll be in the home for less than three years or expect a change in your income or lifestyle, it becomes a preferred choice. “Many older people also choose to rent after having owned their home for years.”
In a few instances, buyers choose to rent a home before buying it, a scenario that suits the buyer more than the seller. “Rent a home before you buy that same home and you can lock in your purchase price, get a steal for the property because you’re living in it and find out what kind of work the house really needs,” says Iris Segal, a realtor in Newtown.
“You don’t have the expense of moving twice and you’re paying a little each month towards your down payment.”
The opportunity to test drive a home is a good one for the test driver. But for the seller, it’s less of a win-win situation, particularly if mortgage rates go up and the renter-buyer no longer qualifies. “This is not a typical arrangement but it can work,” says Segal.
Lease purchases can also be a good idea if you’re thinking of purchasing at the shore, says Joseph A. DiLorenzo, a real estate broker at the DiLorenzo Realty Group in Margate, N.J. “Renting a home for a summer will give a potential homeowner a snapshot of ‘shore living’ on our island,” he says.
“If you are new to the island, this is a good way to experience the lifestyle, beaches, entertainment and local restaurants while deciding which town suits all of your needs.”
Lauren Kramer is a native of South Africa now based in Western Canada. This article originally appeared in the special section of "Real Estate."