What Are the Disadvantages of Rent-to-Buy in WA?

December 29, 2022
What Are the Disadvantages of Rent-to-Buy in WA

Key takeaways:

  • Rent-to-own schemes allow tenants to buy a property through rental payments.
  • The future sale price and rental payment are decided at the start of the rent-to-own agreement.
  • Withholding rent as a tenant will cause them to lose the property and all the money they invested.

Rent-to-buy or rent-to-own schemes for rental properties in Perth, WA, follow a lease agreement that allows you to buy the house when the lease expires.

Rent-to-buy schemes are a good option for aspiring home owners because they ease the tenants and help them safely climb the property ladder. For traditional buying methods, you had to get loans and secure finance before making an initial deposit. Rent-to-own schemes follow a rental agreement, and your financial situation will not restrict you from buying a home. 

Both parties agree on the final sale price the tenant must pay once the rental period is over. This rule also protects tenants from drastic price increases in the property market.

One of the disadvantages of the rent-to-buy scheme in WA is that the buyer does not own the house until the final payment is made. Also, rent-to-buy in Perth requires you purchase the property at the end of the rental period.

How do rent-to-buy schemes work?

Rent-to-own or rent-to-buy schemes have two stages: the renting and purchasing stages.

Renting stage

Very few rent-to-buy schemes in WA offer legit services to aspiring property owners. Once you have decided on a rent-to-own service and market property, you can sign a rent-to-buy agreement.

What Are the Disadvantages of Rent-to-Buy in WA

Some rent-to-buy contracts demand that you make a non-refundable deposit called an “option to buy fee” in addition to their rental payments. However, if you are unable to buy the property or if you do not go forward with it, you will not get a refund.

Tenants must also pay outgoing costs in rent-to-buy schemes such as building maintenance, loan establishment fees, insurance, government fees, and stamp duty, and these payments are also non-refundable.

Buying phase

You can buy the property at the end of your rental period by taking a home loan. The property price is the same as the previously agreed-upon price between the two parties at the start of the rental agreement, minus the extra equity. 

You will get home ownership after you have paid the rental property price, and you will be the legal owner.

What are the disadvantages of a rent-to-own scheme?

Rent-to-own schemes give a lot of ease, especially to first-home buyers, but they also have disadvantages.

One problem is that property values may decrease during the rent phase. Generally, property prices increase over time but can fall during shorter periods.

Another disadvantage is that rent-to-own schemes are expensive. The option-to-buy fee is 1-5% of the purchase price so you will pay more than the market rent. Moreover, you’ll lose the property and all your invested money if you miss any payment.

Seek independent legal advice before signing a rent-to-own agreement to get a good deal and purchase price for rent-to-own schemes.

What is the 5% rule in renting or buying?

The 5% rule is famous in the real estate world, and it was coined by a Canadian investment portfolio manager, Ben Felix. The 5% rule solves the dilemma of renting vs. buying by adding the factor of unrecoverable costs.

Your monthly rent is an unrecoverable cost since you won’t get it back, nor does it help you own the property. On the other hand, homeownership does not involve unrecoverable costs like a mortgage repayment. The 5% rule highlights three types of costs:

  • Capital cost at 3%
  • Annual maintenance costs at 1% of the home value
  • Property tax at 1% of the property value

Adding these gives you 5% unrecoverable costs of your property value.

What is the 2% rental rule?

What Are the Disadvantages of Rent-to-Buy in WA

The 2% rule is a guideline helpful only at the start for evaluating investments to see if the property is worth buying or not. Divide the monthly rent by the purchase cost. If the ratio is less than 0.02, it doesn’t follow the 2% rule.

How much deposit do you need for rent to buy schemes?

For rent to buy scheme, the initial deposit varies for each service provider, property, and rent-to-own agreement. Some ask for a minimal deposit, while others may ask for a larger sum. You can find out if you are eligible for rent-to-own schemes in WA here.

Is the rent-to-buy scheme worth it?

The rent-to-buy schemes have plenty of advantages for tenants. The final purchase price is set upfront in the rent-to-buy house and land packages agreement, so you don’t have to worry about your landlord increasing the costs because of market fluctuation or varying interest rates.

What Are the Disadvantages of Rent-to-Buy in WA

Final thoughts

Rent-to-buy house prices increase daily, and not everyone can afford to pay cash upfront for taking out a home loan from a bank or lending institution. In the case of overdue rent in Perth, what consequences will follow depends on the landlord. Withholding rent as a tenant will cause them to lose the property and all the money they invested.

But what are the disadvantages of rent to buy in WA? Rent-to-buy schemes are great for people looking to rent-to-buy homes but cannot pay the full price immediately. They help you get onto the property ladder and bring you one step closer to your own home. Aspiring home owners can start the rent-to-own process once they have decided which property you want.

Soho is your expert team in Australian real estate, offering an innovative platform for effortless property searches. With deep insights into buying, renting, and market trends, we guide you to make informed decisions, whether it's your first home or exploring new suburbs.
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