All over Canada, the majority of tenants see owning a home as a desirable way to build wealth and secure their future. But very few end up making this dream come true.

As a landlord, you might have realized that most simply rent a place to live while working on their credit score and gathering money until it’s enough to match the required down payment. Is there an alternative to this option that provides a win-win situation for both the potential homeowner and the tenant?

Absolutely yes. Rent to own is a less complex and creative way designed to assist tenants to afford homes that would otherwise be out of reach if they opted for the home-purchasing option.

Gathering all the important information about the rent-to-own option is the first step you need to take in making sure you are ready to try it out with your tenants or enlightening them about it.

Best Rated Full Service Real Estate Services Greater Toronto Area

What’s Rent To Own?

Put simply, when a tenant opts to buy a home under a rent-to-own arrangement, it means they are going to pay their monthly rent as usual, only that a portion of it will be credited as a down payment for the purchase of the home (if they end up buying the home in future).

Naturally, rent-to-own programs in Ontario give tenants with a poor credit score and insufficient money for down payment an opportunity to accumulate the same while living in a house they desire to own.

Rent-To-Own Agreements In Ontario

In a rent-to-own arrangement, you have to prepare two contracts. One will be the basic lease contract, which, in this case, is referred to as the rent-to-own lease agreement, while the other will be the rent-to-own ‘option to purchase agreement.

How long the home will be leased will depend on the agreement reached between you and the tenant. Usually, it’s supposed to be anywhere between 3-5 years. Many landlords, however, prefer 3 years because this period is long enough for a tenant to repair their credit score and accumulate the down payment.

Having clauses regarding aspects such as a late or missed payment, repairs and maintenance, and so on is recommended as it will help to avoid unforeseen conflicts.

Generally, it would be great if you sought the help of a lawyer in drafting the agreements.  Similarly, ask your rent-to-own tenant to get independent legal advice as well and review the contract together with their lawyer, a mortgage specialist, or financial advisor.

The Process: How Does Rent To Own Work In Ontario?

Ordinarily, the rent-to-own agreement will have details such as the rent amount the tenant will pay each month, the amount to be deducted as a down payment, the lease term and the date on which it ends, the period for which the option to purchase the home will be available to the tenant, date the tenant will be legally entitled to own the home, the final purchase price, and lots of other information.

Here’s an example of how the arrangement might work:

A tenant rents your apartment under the typical home lease. Later on, they decide they want to buy it. Now, first of all, for them to receive an option to purchase the apartment in future, they’ll have to part with an extra payment.

If the price of the home is $300,000, you can agree with your tenant that they have the right, but not an obligation, to purchase the home in, say, three years for $350,000. (If you opt to exclude the word ‘option’ in the agreement, it means the tenant is legally obligated to buy the property at the end of the lease.)

In Ontario, the fee for this right, also known as the option deposit, usually ranges from 2.0% to 2.5% of the final purchase price. In our example, 2% of $350,000 would be $7,000. This is the amount due before the arrangement proceeds. Later on, this amount will be deducted from the final price.

As a landlord, it’s upon you to ensure the option deposit is under a separate agreement and not part of the lease because if included and the tenant defaults later, it will be difficult to evict them from your property.

Best Rated Full Service Real Estate Services Greater Toronto Area

Meanwhile, while living in the apartment, your tenant must pay the agreed-upon monthly rent amount and also add an additional amount for the 5% down payment due in the agreed amount of time.

Here’s how the calculations might appear, assuming the amount is due in 3 years.

Amount owing after 3 years: $350,000- $7,000 (optional deposit) = $343,000

Required 5% Down Payment: $5 x $343,000 = $17,150

Monthly rent: $1400

Additional amount for down payment: $500/month

Total Down Payment After 3 Years: $500 x 36 = $18,000

Balance After Paying The Down Payment: $18,000 – 17,150 = $850

Going by this example, your tenant will pay a total of $68,400 in rent over 3 years, $18, 000 of which will be the amount saved for the down payment. It’s up to the tenant to decide what to do with the amount that remains after putting the 5% down payment.

From here onward, your tenant will pay regular installments over a specific period of time until the balance is paid off if they decide to go ahead and purchase the home.

What Of Changing Real Estate Prices?

Another question landlords ask a lot is, “how does rent-to-own work in Ontario, given the ever-changing real estate prices?” Well, typical of the real estate market, there’s a higher likelihood of the prices for your rent-to-own homes in Ontario changing.

Of course, the final purchase price will mostly be based on today’s market price, and it can be difficult to predict what the house may be worth in the future.

One way to take care of this is to agree to a particular percentage increase with your tenant each year of the lease term or have your home-to-own tenant pay the appraised value of the home at the expiry of the term.

Best Rated Full Service Real Estate Services Greater Toronto Area

Advantages For The Landlord

Rent to own is a better alternative to selling your home if you are having difficulties taking it off the market or renting it out for the long term. What’s more, since the price is established in the rent-to-own agreement, you are aware of exactly what to expect if the sale is successful. Also, since the tenant has an option to purchase the home, they are more likely to take good care of the property.

In Conclusion

Making the rent-to-own option available to your tenants and potential tenants is one way to accommodate prospective homeowners who can’t afford a home through the other home-buying options. As you’ve noticed, the concept sounds quite simple, but as we mentioned earlier, first understand clearly how rent-to-own works in Ontario and all the other information revolving around it.

The truth is, rent to own is more likely to work for you as a landlord only if you prepare well for it in advance. More importantly, ensure proper credit and background checks, preferably by a competent property management company, are done to ensure the client has the capacity to make all the required payments.