How Rent to Own Houses Work in Canada

One real estate strategy that I’m quite familiar with, but never written about, is rent to own or lease option homes.  What is a rent to own home?  It’s pretty much exactly as it sounds.  It’s where an investor, or home owner, rents out their property to a tenant, but gives the tenant the “option” to purchase the home after a certain period of time at a predetermined price.

Home owners sometime use this strategy as an incentive to get their home sold, even if it means taking payments for a certain period of time.  Home buyers with not so great credit, and low amount of savings for down payment,  may find this method of financing attractive.  It enables them to get into a home right away, while building their credit and down payment through rent credits.

For the investor, selling a house via rent to own or lease option is very similar to selling a covered call.  The tenant has to pay the investor an upfront “premium” for the option to purchase the house, this is called the “option deposit”.

At the expiry, which is negotiated between the investor and tenant, the tenant has the option of purchasing the house at a predetermined price.  The option deposit, along with any rent credits, are used as part of the down payment on the house.

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How does rent to own work?

  1. House is listed as a rent to own with monthly rent at the high end of rentals in the area, and a small option deposit (1-2% of property value).  The option deposit goes towards the purchase of the home and is non-refundable.
  2. Tenants are screened for decent credit, employment and potential for purchasing home at end of the term.
  3. Tenant moves in, landlord collects rent and option deposit upfront.  A separate lease and purchase agreement is signed.
  4. A small portion of the rent, called a rent credit, is put against the purchase price of the home.  The rent credit is at the discretion of the investor.
  5. If the tenant decides not to buy, the tenant loses their option deposit and rent credits.

Investors Perspective

Benefits

  • Rents are typically higher;
  • Option deposit collected upfront;
  • Tenant is responsible for maintenance and repairs;
  • Tenant typically treats the home as if it is their own; and,
  • Guaranteed sale price if tenant exercises their option.

Negatives

  • Setting a ceiling on selling price of the house, especially in appreciating markets;
  • The initial due diligence required to screen tenants; and,
  • Tenants can walk away from the deal at any time, but investor is bound by terms of the purchase agreement.

Tenant Perspective

Benefits

  • Tenants can “test” the house and the neighborhood and can walk away from the deal at any time.
  • Tenants with mediocre credit can build their credit over the term and build their down payment via rent credits.

Negatives

  • Tenant pays premium rent for the “option” to purchase the house.  If the tenant decides not to buy, the option deposit is lost.
  • Bank financing is not guaranteed at the end of the term.

Final Thoughts

From an investors perspective, this is one way to make money via real estate, however, placing a cap on the selling price is the deal breaker.  Personally, I’d rather build equity over time and keep the property for the long term.  However, I can see this being a viable solution for home owners who are having trouble moving their home in a buyers market.

Do you have any experience with rent to own homes in your area?

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Wendy
3 years ago

I have a property that a young man wants to purchase on a rent to own contract. I’m confused as to how this works. I was under the impression that he would rent the house for a period of two to three years at an agreed upon rental rate. Plus make extra compensation to be put in a separate account to be saved for his down payment.
When that has been saved the agreement then go from renting to tent to own for the balance of the mortgage. How far off track am I?

Susan
4 years ago

We did a lease to own for our house for now 9 months, the tenants have been late paying rent 8 out of nine months, very hard on our family to support 2 mortgages. Clearly they had broken the lease to own agreement many time. Getting to be a hassle now getting the rent from them.. Any advice? We are actually thinking about getting a lawyer to see what options we have. Every month its the same thing, they do not have the money to pay the rent on time. Very frustrating !

Jamie
4 years ago

I have someone that wants to rent to own my condo. He wants to put 20,000 down and then 500 a month for rent credit for a two year contract. Do I need to save that money in a trust account for the two years or can I spend it as I get it?

Mike
4 years ago

In a rent-to-own scenario, would the owner have to declare the rent paid by the tenant as rental income or does the CRA view this as merely an advanced down payment prior to purchasing the property as opposed to “rent”? If the CRA does not see this as rental income from the perspective of the owner, what is to stop anyone who owns property and rents it, then subsquently sells it to the renter as stating it was a rent-to-own all along to avoid having taxable rental income?

M Glass
5 years ago

If a tenant is not able to complete the purchase at term end – can the original deposit, and the portion paid per month towards the purchase price, be claimed as an Investment Loss on taxes (in Canada)?

Eric
5 years ago

Hi I have a relative that has been sitting on a property for over a year now unable to sell do to market conditions. They own the property outright but have not wanted to rent it, if I wanted to do a rent to own with them would I need to contact a lawyer to write a contract of would we be able to draft something are selves just curious want my options are working with family on this.

Patricia oleary
5 years ago

I need to own a house. I pay 1700 a month rent

MARIEROXANNE
5 years ago

I don’t even make that much per month! YIKES!

Trevor
5 years ago

Rent to own is more or less a scam. We were looking into it and every realtor and our lawyer suggested we avoid it. Rent to own is actually a misleading name…as it really boils down to is an alternative mortgage. Basically if folks had that down payment, they would be looking at legit slt mortgages or even a straight mortgage. This whole system is designed to take advantage of people, its a major league gamble for the potential buyer

Marie roxanne
5 years ago

Why can’t the rent-to-own be like it sounds like? Rent until you own. So if you want to buy a home that is typically $139,000 or so, you would give the owner $1000 (then you would have to pay your own hydro etc…) per month for 12 years, then the buy out price is $144,000 and at the end of the 12 years, it’s yours. No need for mortgages, no need to borrow, and no need for a down payment. I think that’s pretty simple.

con
5 years ago

comments here put the tenants at risk and the seller wins. Not so. I have leased my mobile home on rent to own basis. we have a signed contract written up by lawyer, he has been late paying 7 times in 8 months, contract states he is responsible to properly maintain property and fixtures yet continually TELLS me I have to fix them, wrote me a letter he is not paying rent until I fix something, leaves property very untidy with lots of junk, etc.etc., There isn’t anything out there to give me guildlines or legislature for my rights as the owner. Costly court costs are my only option.
Considering doing this as a seller, make sure you KNOW what you are getting into legally ( cover all negative senarios) and how to get out of it legally without running up a huge bill BEFORE you sign lease