It’s no secret that when you rent, you’re basically helping your landlord build equity in their property. But what if we told you that there's a way in which you could make your rent payments to help you cash in on your home equity?

Yes! Through a rent-to-own agreement, you can rent an MLS listing in Toronto for a specific period, usually one to three years with the option to buy it later. A portion of this monthly rent payment usually goes towards the down payment on the home.

How Does a Rent-to-Own Agreement Work, and What Types Are There?

In a rent-to-own agreement, you basically rent a home with the intention of buying it later. You’ll sign a contract that outlines the terms of the agreement including the rental period, the purchase price, and the option to buy it at the end of the rental period.

During the term of the rent-to-own agreement, you’ll have to pay monthly rent and a portion of that rent usually goes towards your future purchase price (rent credit). Along with the monthly rent, you may have to pay an upfront option fee which gives you the right to buy the home later. This fee can range from 1% to 5% of the sale price of the MLS listing in Toronto. You must keep in mind that this option fee is typically non-refundable but it may be credited toward your purchase price if you decide to buy the home later on.

Rent-to-own agreements usually come in two basic types - lease-option and lease-purchase agreements.

1. Lease Option Agreement

Under this agreement, you’ll have the option to buy the home at the end of the lease period. If you decide to buy the home, the option fee is credited towards the purchase price. But in case you choose not to buy, you can walk away without any further obligations but you’ll lose the option fee.

2. Lease-Purchase Agreement

This type of agreement requires you to buy the MLS listing in Toronto at the end of the lease period, legally. A homeowner goes for this agreement to minimize their risk in case the renter leaves without buying the property. Hence, under this agreement, apart from losing the option fee, you might have to face legal action from the owner if you decide not to buy the property.

Why You Might Want to Consider a Rent-to-Own Deal While Buying Your First Home

1. Time to Save for a Down Payment

One of the biggest hurdles in buying your first home is usually the down payment. However, the rent-to-own model gives you time to save for the down payment while staying in your future home. As mentioned already, a portion of the money you pay for rent in a rent-to-own home goes towards the down payment.

2. Time to Improve Your Credit Score

While you’re renting under a rent-to-own home agreement, you can put your efforts towards paying your bills on time and reducing debt which can help your credit score to go up. And with a better credit score, you’ll be more likely to qualify for a mortgage at a better interest rate when the time comes to buy the MLS listing in Toronto.

3. Locked-In Purchase Price

Another good thing about rent-to-own agreements is that the home purchase price is usually locked in at the start. This means you won’t have to worry about the home price shooting up while you’re renting.

4. Get a Feel of the Space Before Committing to It

Rent to own is also a great way to test drive your future home and neighbourhood. You’ll have a chance to truly experience the space and the neighbourhood before making a final commitment. This can help you figure out if the MLS listing in Toronto is a perfect fit for you or not.

The Flexibility of Rent-to-Own Homes Comes with Strings Attached

You might be thinking now that rent-to-own is the perfect way to buy your first home. After all, you can stay in your future home while saving for a down payment and improving your credit score for the home loan. Plus, if you decide not to buy the property, you can simply walk away. Sounds great, right?

But hold on! Rent-to-own homes also come with these downsides that might make you rethink your decision -

1. Higher Rent Payments

Rent-to-own MLS listings in Toronto often have a higher rent than a traditional rental agreement. That's because part of your rental payment goes towards your future down payment hence the high rental rate is a given. Also, the seller of a rent-to-own home usually accounts for the potential profit they might miss out on if they would have sold the property on an open market.

2. Potential for Overpayment

When you enter into a rent-to-own contract, you lock in the purchase price of the home. This can be a good thing for you if the home’s value increases during the rental period. But if it falls, this can become a missed opportunity for you - you’ll have to pay more for the home than it’s actually worth.

3. Seller’s Discretion

In a rent-to-own agreement, the seller might have the option to terminate the agreement if you fail to meet certain conditions. For instance, if you don't make rent payments for the MLS listing in Toronto on time. This can keep you in an insecure position throughout the agreement period.

4. Risk of Losing Money

If you don’t qualify for a mortgage or nullify the contract, you could lose the money you spent on the option fee and potentially any rent credits accrued - a big financial loss.

Make Sure to Read the Rent-to-Own Agreement with a Fine-Toothed Comb

A rent-to-own agreement is a legal contract that outlines your rights and responsibilities all well as those of the property owner. Hence, before signing on the dotted line of the home agreement, understand what you’re getting into. Unless you’re okay with finding yourself in a situation later on where you're not protected or where you're obligated to do something you didn't expect.

Remember, during home-buying, it's always better to be safe than sorry.