When it comes to housing, the most common question is: should I buy or rent? But there is a halfway option that lets you enjoy the benefits of both. With rent-to-own, you can rent and live in a house you eventually buy.
The rent-to-own agreement
Rent-to-own involves a double agreement: one for renting and another for buying. This means you sign a regular rental agreement and fix a period by which you can decide to buy the property.
At the end of the stipulated period, the tenant has the right to buy the property for the price agreed with the landlord at the time of signing the contract. The price is reduced – partially or totally – by the rent paid up to that moment.
This option is great for people who have not saved enough to buy a home but do not want to miss the opportunity to buy or are hesitating about whether or not to do so.
How rent-to-buy works
Before signing any rental agreement regulated by the Urban Renting Law (LAU), it is important to specify how long the tenant can remain in the property, how long the tenant has to buy the house, the monthly rent, who will pay the expenses derived from the rental (utilities, taxes, etc.) or who will carry out the reforms and repairs in case they are necessary.
Concerning the future sale, under the legislation of the Civil Code, the following must be indicated: the final price of the transaction, the percentage of the rent to be deducted from the final price (total or partial), the initial amount or deposit to be paid to formalise the contract (between 5% and 10% of the sale price which will later be deducted from the sale if it becomes effective and which the tenant will not recover if they do not finally buy the property).
However, with a rent-to-own agreement, the tenant can buy the property before the deadline if they have enough money to do so, and also has preference over other buyers. As it is a complex agreement, it is best to seek advice from a lawyer.
Duration of the rent-to-own agreement
The duration will always depend on what has been agreed between the tenant and the landlord. The LAU stipulates five years for rental agreements, which can be extended if both parties agree. If this occurs, the new conditions, purchase price and other relevant aspects must be updated.
On idealista, you can download rental agreements in compliance with the latest law in Word or PDF format for free.
Advantages of rent-to-own
Rent-to-buy has several advantages for both the tenant and the landlord:
Benefits of rent-to-own for tenants
- Some or all of the money you pay for rent is deducted from the property price.
- You can choose to keep the house you like in reserve while you save up to buy it.
- By paying monthly instalments, you reduce the amount needed to buy a property.
- Living in a rent-to-buy property gives you the chance to be sure that the house really meets your expectations. In addition, you can check if you like the location, if it is noisy, what the neighbours are like, etc.
Benefits of rent-to-own for the landlord
- More security concerning rent payments, as rent must be paid to execute the purchase option.
- Since a deposit of 5% to 10% of the sale price is required, this is insurance against non-payment.
- You can enjoy the tax advantages of renting.
How much can I save with a rent-to-own flat?
There are several financial advantages of opting for rent-to-own. The first is being able to defer a significant part of the outlay, which offers financial flexibility in the short term. However, the real savings come when considering the amount of mortgage loan required.
To understand this better, let's look at a practical example with a house worth €120,000:
- Property price: €120,000.
- By opting for a rent-to-own agreement, you agree to a five-year lease.
- The agreed monthly rent is €1,000.
- At the end of the five years, you have paid €60,000.
- This means you only need to pay the remaining €60,000. If you decide to take out a mortgage for this amount, you could opt for a shorter term, benefiting from lower interest rates compared to a larger loan.
On the other hand, if you decide to buy the property initially without opting for rent-to-buy, you would probably need a higher mortgage amount; let's say €100,000, considering that most financial institutions offer up to 80% of the total property value. Therefore, the interest and amortisation period will be longer, i.e. you will have to pay more in the long run.
In addition, there could be another saving: the property could increase in price during the rental period. The landlord would be obliged to sell at the price agreed in the original agreement. However, this is a double-edged sword. Just as the house price goes up, it could also go down due to the market.
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