Here's What Dave Ramsey Recommends Instead of Buying a Rent-to-Own Property

Before you decide to buy a property using a rent-to-own arrangement, you should read Ramsey's advice.  

If you're looking into different ways to buy a home, rent-to-own properties may be on your radar. With this kind of property, you don't just get a mortgage, purchase a home, and move into it right away. 

Instead, you lease a property under an arrangement that allows you to buy it at the end of a set time. When you move into the property and begin paying rent, some of that money goes toward your purchase so you acquire equity that can be used as a down payment to qualify for a home loan. 

This might seem like a wise approach to saving up for a down payment while testing out living in the home you'll someday buy. But finance expert Dave Ramsey doesn't think rent-to-own is the right option for most people. Instead, he outlined a simple alternative.

This is what Ramsey says you should do instead of rent-to-own

Rather than entering into a rent-to-own agreement, here's what the Ramsey Solutions blog recommends doing instead: 

"Why not just rent a place for less money and set aside savings for a down payment in your own bank account instead of your landlord's?" the blog reads. 

See, as Ramsey explains, when you enter into a rent to own agreement, you pay more each month for housing than you would in a traditional rental arrangement. And you end up either losing that extra money or being forced to buy a home on the predetermined schedule outlined in your lease-purchase agreement. 

"Your rent will be more expensive," Ramsey explained. "When your contract is set up so part of your rent goes toward home equity every month, your rent will be higher. You're basically stuck in a forced savings plan where you feel pressured to buy a house at the end -- whether you're ready or not."

If you instead just rent under a traditional lease, you won't pay as much to your landlord so you'll have more money you can put into savings. These funds can be used as a down payment when you feel like you're in a good financial position to buy. At that time, you can find a home and make a fair offer. Ramsey believes this is a far better approach. 

Is Ramsey right?

There is no doubt that Ramsey's advice is worth following. Rent-to-own agreements are often not favorable for buyers. 

You could get stuck paying the added rent and maintenance costs your landlord would otherwise cover for months or even years. Then, if you can't get a mortgage to buy the house or you decide for other reasons that you no longer want to follow through on the purchase, you could be out all of that money if you don't move forward with buying.

If you agreed upfront on the price of the home and property values fall, you could also end up paying an inflated price for the property.

All of these downsides could be avoided if you simply do what Ramsey suggests and find an affordable place to rent while putting down payment money into savings. Of course, you need to be responsible enough to actually save the difference. Some people who feel like they can't do that might be better off with the forced-savings approach of a rent-to-own agreement, even with the other downsides.

Ultimately, you should consider what you feel is best, based on your financial habits -- but if you can, heeding Ramsey's advice and following his recommended approach is the smartest move.