Many people are now starting to take an interest in rent to own / lease options / rent to buy. We published an article about lease options earlier, this article gave an overview of how lease options were used. We are also now proving a real example of a rent to own opportunity to show what a tenant-buyer may expect to find.
THE PROPERTY AVAILABLE AS RENT TO OWN
The property is a 3 bedroom end of terrace house in Andover, Hampshire and has a current value of a little below £150,000.
The vendor is offering the property to purchase at ANY TIME in the next 5 years for a fixed price of £150,000
The rent for the property is £700 pcm, which is around the market rent level. This rent is FIXED for 5 years, no increases.
The tenant-buyer pays an additional £100 pcm on top of their £700 rent, this additional £100 pcm goes toward the eventual purchase deposit.
The tenant-buyer pays an initial deposit of £2,000 when they move in, a little more than you would expect to pay when renting.
LOOKING AT THE FINANCIALS FOR THIS RENT TO OWN EXAMPLE
The rent is fixed for 5 years at “today’s” market rent. So in subsequent years you will be “saving” on the monthly rent assuming rents go up with inflation. Lets assume you save £15 pcm in year one, £30 pcm in year 2, an so on. Thus after 5 years you have saved £1,800.
Over the 5 years you will have saved £100 pcm toward your purchase deposit, in addition to the initial £2000 deposit you paid. In total you will have saved £8,000 toward the purchase deposit in 5 years time.
Lets assume the property prices will be 15% higher than today in 5 years time, based on today’s price of say £145,000 that gives a valuation in 5 years of £166,750. Giving a capital gain on the property of £16,750
FINANCIAL SUMMARY
Property value in 5 years time = £166,750
Amount you need to pay is £142,000, this is the £150,000 fixed price less that £8,00o saved up.
A mortgage for £142,000 equates to approximately 85% of the property’s value, so you should have no problem getting a mortgage.
And to cap it all off you own the property and have equity of £24,750
Of course any one’s circumstances can change in 5 years time, but as you are no obliged to purchase the property you can walk away from it any time , all you would lose is your deposit and £100 pcm savings.
