Study: Rent-to-Own: Pros, Cons, and Consumer Views
KEY POINTS
- RENT-TO-OWN APPEAL: 79% of respondents would consider a rent-to-own agreement for home purchasing, with millennials showing the highest interest at 86%.
- FINANCIAL FLEXIBILITY: The primary draw for rent-to-own homes is the ability to buy a home without strong credit or upfront savings for 50% of interested respondents.
- MAINTENANCE AND VALUATION WORRIES: The biggest concerns about rent-to-own agreements include being locked into a home valuation (33%) and potential maintenance costs (30%).
Jay-Z, Will Smith, and Sequoia Capital -- those are some of the names that have poured millions of dollars into the rent-to-own resurgence in recent years.
A new survey from The Motley Fool Ascent suggests that the rent-to-own comeback may be for real.
Seventy percent of Americans are aware of the rent-to-own process and 79% would consider using a rent-to-own agreement to purchase a house. Millennials are most interested in rent-to-own homes.
For more data on rent-to-own trends plus answers to questions like how rent-to-own agreements work, what the pros and cons of rent-to-own are, and who rent-to-own is right for, read on.
Jump To
- How rent-to-own works
- 70% of Americans have heard of rent-to-own
- 86% of millennials would consider renting-to-own -- more than any other generation
- Using the rental process to build towards home buying is the biggest draw of rent-to-own
- Locking into a valuation and being responsible for maintenance are the largest reasons people would not consider rent-to-own
- FAQs
- Methodology
- Sources
How rent-to-own works
A rent-to-own agreement functions like a lease with an option or commitment to purchase the leased property after a certain period of time.
There are two types of rent-to-own agreements: a lease-option agreement and lease-purchase agreement.
Under a lease-option agreement, the lessor has the option to purchase the leased property after a certain period of time.
Under a lease-purchase agreement, the lessor commits to buying the leased property after a certain period of time.
There are several other unique parts of a contract for a rent-to-own home:
- The purchase price: A rent-to-own contract should include clauses on the home's purchase price, including when and how it is to be decided on. In some cases, the purchase price will be decided on before the rental period ends, while in other cases it will be decided prior to that. This locks in the purchase price while the home is being rented.
- How rent is applied to the rent-to-own home purchase price: In some rent-to-own agreements, part of each rent payment goes towards the purchase price of the rent-to-own home. In those instances, rent may be higher than typical.
- Maintenance: It is not uncommon for the lessor to be responsible for maintenance of rent-to-own homes. In standard lease agreements, landlords are generally responsible for maintenance.
70% of Americans have heard of rent-to-own
Seventy percent of Americans have heard of rent-to-own agreements in the context of home buying, according to a survey from The Motley Fool Ascent.
| Generation | Percent that are aware of rent-to-own agreements in the context of home buying |
|---|---|
| Baby boomers | 63% |
| Gen X | 69% |
| Millennials | 75% |
| Gen Z | 64% |
| All respondents | 70% |
Millennials were most likely to have heard of rent-to-own (75%), followed by Gen X (69%). Baby boomers were least likely to have heard of rent-to-own in the context of home buying (63%).
Rent-to-own is not a new concept. Rent-to-own homes gained popularity in the middle of the 20th century as a path to homeownership for African Americans who struggled to find mortgage lenders that would serve them. However, those agreements have been subject to scrutiny and legal action for trapping the families they were supposed to help in contracts with bad terms.
86% of millennials would consider renting-to-own -- more than any other generation
Overall, 79% of respondents said they would consider rent-to-own, with millennials being more likely than any other generation to consider a rent-to-own home.
| Generation | Percent that would consider renting-to-own |
|---|---|
| Baby boomers | 58% |
| Gen X | 74% |
| Millennials | 86% |
| Gen Z | 77% |
| All respondents | 79% |
Baby boomers are by far the least likely to consider renting-to-own. This could be due to baby boomers already composing the largest share of homeowners by generation.
Additionally, older generations may be more prepared to make a down payment and have the credit necessary to secure a favorable mortgage loan -- two challenges in the home-buying process that rent-to-own agreements are meant to help address. Younger home buyers, for example, are more likely to be turned down for a mortgage, according to Zillow.
Using the rental process to build towards home buying is the biggest draw of rent-to-own
Among respondents that would consider a rent-to-own home, the biggest draw is the ability to purchase a home without strong credit, saving for a down payment, or qualifying for a mortgage.
| What makes the rent-to-own process something you would consider? | Percentage among respondents interested in rent-to-own |
|---|---|
| The ability to live in a space before agreeing to buy it | 39% |
| The ability to lock in a purchase price a year or more before buying the property. | 11% |
| The ability to purchase a home without strong credit, saving for a down payment, or qualifying for a mortgage. | 50% |
In many cases, rent-to-own homes are purported to help home buyers navigate those steps in the home-buying process, which can be difficult for low-income families or those with poor credit.
Rent-to-own agreements can be an avenue to help families build credit by making on-time rent payments, so they can qualify for a better mortgage when the time comes to purchase the home, for example.
The chance to build credit, put a portion of rent towards a down payment, and work towards qualifying for a mortgage while renting is a bigger draw for Gen X (55%), millennials (50%), and Gen Z (50%) than it is for baby boomers (39%).
| Generation | The ability to live in a space before agreeing to buy it | The ability to lock in a purchase price a year or more before buying the property. | The ability to purchase a home without strong credit, saving for a down payment, or qualifying for a mortgage. |
|---|---|---|---|
| Baby boomers | 42% | 18% | 39% |
| Gen X | 37% | 9% | 55% |
| Millennials | 40% | 10% | 50% |
| Gen Z | 39% | 11% | 50% |
Baby boomers see the chance to live in a space before purchasing it as the biggest upside to rent-to-own, assuming the agreement has an option to purchase instead of an upfront commitment.
Baby boomers are also somewhat more likely than younger generations to view the ability to lock in a price a year or more before purchasing the home as the largest advantage of rent-to-own.
Americans with a net worth of over $1 million are less likely to consider the ability to begin the home-buying process without strong credit or saving for a down payment as the biggest draw of rent-to-own, likely because those present less of an obstacle for them.
Instead, they're more interested in the chance to lock in a home valuation a year or more in advance of buying the home and being able to live in the home before buying it.
| Net worth | The ability to live in a space before agreeing to buy it | The ability to lock in a purchase price a year or more before buying the property. | The ability to purchase a home without strong credit, saving for a down payment, or qualifying for a mortgage. |
|---|---|---|---|
| Over $1 million | 45% | 15% | 41% |
| Under $1 million | 37% | 9% | 54% |
Locking into a valuation and being responsible for maintenance are the largest reasons people would not consider rent-to-own
Being locked into a valuation is a double-edged sword -- it was the most-cited reason for not wanting to enter into a rent-to-own agreement among respondents who said they aren't interested in renting-to-own.
| What makes the rent-to-own process something you wouldn't consider? | Percentage among respondents not interested in rent-to-own |
|---|---|
| Being locked into a home valuation for one or more years while renting before purchasing the home | 33% |
| Needing to pay for home maintenance and other expenses while renting | 30% |
| The additional rent-to-own option fee | 24% |
| Other | 13% |
Potentially being responsible for maintenance was the second largest turn off for those skeptical of rent-to-own homes.
FAQs
There are pros and cons of renting-to-own for home buyers. Here are some of them.
Pros
- A path to homeownership: Renting-to-own is an option for households that want to become home buyers but are struggling to put together a down payment or build credit for a reasonable mortgage. The rental period of the contract can help families improve their credit to qualify for a mortgage that covers the remaining balance of the home once the rental period ends.
- Purchase price lock-in: In a seller's market (when housing prices are quickly rising), the ability to lock-in a home purchase price years in advance of the actual purchase date is an attractive proposition, even if the agreed upon price is slightly above the current market value.
- Living in the home: If the agreement is a lease-option deal that doesn't obligate the lessor to purchase the home at the end of the rent period, the chance to live in a potential home and neighborhood for a year or more before committing to buy is a unique plus.
Cons
- Expensive exit options: Opting to not carry through with purchasing the home at the end of the rental period is an expensive proposition. In addition to the rent-to-own option fee generally paid upfront, lessors will also lose principal paid each month towards the home itself, leaving them with no equity.
A worst-case scenario is one in which the lessor has signed a lease-purchase agreement but is not in a financial position to follow through on the home purchase.
- Purchase price lock-in: Locking in the purchase price years in advance is also a potential con in a buyers market, when home prices decline. Lessors could end up committing to a price that exceeds the home's market value when the lease period ends.
- Maintenance costs: Generally, renters are not responsible for maintenance. In rent-to-own agreements, landlords usually pass that cost and burden on to lessors.
Rent-to-own homes may be right for interested home buyers who are not currently in a position to put together a down payment or qualify for a reasonable mortgage, but have the capability to improve their financial situation in the near future and apply for a mortgage a year or more down the line.
A lease-option agreement provides the lessor the option to purchase the property at the end of the lease period. Opting not to purchase the home can be costly, as the renter does not acquire any home equity if they decide not to purchase despite making payments towards the home in addition to rent.
A lease-purchase agreement obligates the lessor to purchase the property at the end of the lease period. This is a legal obligation.
To qualify for housing offered through Permanently Affordable Housing programs, individuals must be income-qualified, usually at a percentage of the Area Median Income of the home, depending on household size. Permanently Affordable Housing programs may also restrict the sale price of the home to make it affordable for low- and medium-income households.
Rent-to-own homes generally do not include such restrictions.
Do your due diligence to avoid rent-to-own scams. Consider using a real estate agent to vet properties and sellers, just like you would for a more traditional real estate transaction. Check to see if the seller actually owns the property you're renting-to-own and make sure they're up to date on their property taxes. Consider getting the house appraised before signing the rent-to-own agreement. Ensure the house is not being foreclosed on.
Methodology
The Motley Fool Ascent distributed a survey via Pollfish on Jan. 6, 2023. 1,400 respondents had a net worth below $1 million and 600 respondents had a net worth of at least $1 million. Respondents were 49% male and 51% female.
Sources
- Federal Trade Commission (2016). "What you need to know about rent-to-own home deals."
- The Ascent (2021). "Millennials Account for 37% of Homebuyers, Over 50% of New Mortgages."
- The Washington Post (2020). "Rent-to-own options in housing: Move in now, buy later."
- Zillow (2022). "Buyers: Results from the Zillow Consumer Housing Trends Report 2022."
Our Research Expert
Jack Caporal is the Research Director for The Motley Fool and The Motley Fool Ascent.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.