Investing in real estate allows you to enjoy a positive cash flow, capitalize on physical assets, and maximize tax benefits. However, when you are investing in a property to live in, emotions come to influence your purchase decision. You need to carefully select a property, one to absorb and fill with your energy. Be careful not to let your emotions drive too far because they can blur your judgment and alter your decision. The best advice to be given to potential homebuyers is to rent before owning. Not only will you be able to try the house, but you will also be able to enhance your credit score—if you are not qualified yet for a loan. Lease to own homes is one way to rent before owning, if you aim to eventually buy a house. An emerging trend that many have been investing in, lease to own homes is advantageous to not only buyers but sellers as well.
Related: Buying a Rental Property: Should You Go For One Expensive or Two Cheap Properties?
Below, it is defined what we mean by rent before owning and outline the benefits that this method provides. If you are looking for a home to buy, you are encouraged to rent before owning. This is especially true given the rising prices of homes that are experienced in the seller’s market today. Before we delve into rent to owning and lease to own option, let’s see what a seller’s market is.
In a seller’s market, property inventory is short; the demand has far exceeded the supply. The current housing market is a seller’s market because it has been characterized by a very short inventory of homes. Homes that are most affordable to first-time homebuyers are typically the ones that are short in supply. Prices are going up, but home sales are still growing. The low supply of housing has helped push up prices to create competitive markets. 13% higher than a year ago, the median home price in the second quarter of 2017 reached $225,000. We recommend you to rent before owning to be able to fully comprehend and absorb the market before you make a purchase. In a time where the economy is volatile, rent before owning becomes more feasible. This is why.
Related: How to Buy a Rental Property in a Seller’s Market
Rent Before Owning: Build Your Credit Score and Save for Cash Down Payment
A lease to own option is a contract that you sign to agreeing to pay monthly rental payments for a home for some predetermined time while enjoying the possibility of purchasing it at the end of the lease. Upon singing the contract, you are indebted to pay option money, which may contribute to the final purchase of the home. Additionally, about 25% of the rent that you pay monthly goes to the final purchase price as well.
It is advised that people rent before owning, especially millennials, who are new entrants to the housing market and do not typically qualify for mortgage. A low credit score or lack of cash for down payment may disqualify you from getting a mortgage. Lease to own option, on the other hand, doesn’t enforce on you a credit score necessary to fulfill, making it more accessible and convenient. While you have to pay option money upon signing a contract, the option money is usually 1%-5% of the home value, much less than that required for a mortgage down payment. If you do not have the score or the cash for a down payment, opting for the lease to own option offers an alternative. Not only will you be able to build your credit score as you accumulate equity, but you will also be able to save for a cash down payment when you finally buy the house.
Rent Before Owning: Test Drive the House, You May Not End Up Wanting It
Rent before owning allows you to get to know the house while still being able to decide if it’s the right environment, neighborhood, and property for you. It gives you the flexibility to change your mind, may you need to do so down the road. Whether it is a new job requiring you to relocate, graduate degree plans, or unexpected change in life plans, lease to own homes are preferable. Lease to own homes offer you the advantage to rent with the possibility of buying at the end of the lease. Upon living in the house and assessing it, you will be more at ease when making that decision.
Rent Before Owning: No Taxes, Less Liability
Whether you sign to a lease to own or lease purchase, you will remain a tenant until you finally purchase the house. Since you – the buyer – do not yet own the home, you will not have to pay property tax. You will have fewer liabilities and therefore more money to save for the cost of the home when you finally purchase it. It is important to note that while you will not be enjoying the same tax advantages as those from immediately buying a home, you may be eligible for a renter’s tax deduction. Check with your real estate agent and inquire about the taxes and the tax advantages you can enjoy as a renter.
Rent Before Owning: Save Money for the Long Term
Closing costs can be draining for many. If you fail to correctly itemize all fees associated, you might end up unable to finish your home payments. In a lease to own option, you won’t be dealing with the closing fees and the long wary procedures that they accompany. Additionally, maintenance expenses will mainly be the landlord’s responsibilities. This means that you will be paying for fewer expenses, while saving money for the long term. For those who aren’t financially capable, lease to own homes can lift off many of the financial obligations that buying a home accompanies.
Related: Lease to Own Option and its Pros and Cons for Buyers and Sellers
Buying a property today might not be the best idea since home prices have been on the rise. Thus, it is highly recommend that you meticulously consider the options available to you before purchasing a property. If you, moreover, do not have the cash for a down payment nor good credit score to qualify for a mortgage, you are encouraged to rent before owning. Today, arrangements such as lease purchase and rent to own are becoming tremendously popular. Not only will a potential homebuyer find this method more affordable, but it will grant the buyer more flexibility. May the buyer not like the home in some years’ time, he/she can opt out from purchasing it.
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