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If you are thinking about moving into a rent-to-own property, you may notice the monthly cost of rent is higher than for comparable spaces that don't come with a lease-purchase arrangement.
Paying more for housing is never fun, but there's actually a reason why you'd face a bigger monthly bill for a rent-to-own space. Here's the justification for the added cost, according to finance expert Dave Ramsey.
This is why rent-to-own homes cost more
Ramsey explained that many people are surprised to discover rent-to-own homes can come at a premium price. "Lease-to-own rent payments are typically higher than regular rent prices in the same area," the Ramsey Solutions blog reads.
The finance guru also spelled out two big reasons why that's the case.
"Most sellers set aside a percentage of your rent payment each month as a credit toward your future purchase," Ramsey said. "Because they set that money aside for you -- instead of putting it into their own pockets -- they raise the rent to make up the difference."
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In other words, when you make a rent payment, a part of the money goes toward acquiring equity in the home. This is your ownership interest and it can serve as part of your down payment when you go to buy the home.
The fact that you are paying this added money toward acquiring ownership is one reason why people choose rent-to-own homes in the first place. But you still have to pay the landlord rent for the space the landlord owns until you become the new legal owner. So you end up paying more each month.
There's also another reason why you could end up paying higher housing costs in a rent-to-own situation, though. "Even if your rent doesn't go toward the purchase price, rent-to-own homes usually cost more than renting a regular apartment because you might be stuck paying for upkeep," Ramsey warned.
This could be a big downside. While landlords typically pay for maintenance and repairs under a traditional lease, you can become responsible for those costs in a rent-to-own agreement. These maintenance and repair costs are money you don't get back if you decide not to follow through with a purchase.
Should you pay extra for a rent-to-own home?
Paying a higher monthly rent can be a wise financial move if this is the only way you think you can move forward to eventually becoming a homeowner. Homeowners tend to be wealthier than renters simply because their monthly housing payments don't just go toward putting a roof over their heads -- the payments also enable them to acquire ownership of a house worth hundreds of thousands of dollars. So if this is your only path, it may be worth taking.
But, there are usually better ways to buy a house than rent-to-own. For example, you can just continue renting at a more affordable rate while you work on improving your credit and becoming a well-qualified borrower. You can save the extra money you would have spent on rent-to-own to amass the funds you need for a generous down payment so you can more easily qualify for a mortgage at a competitive rate. Then you can find a house to buy when you're financially ready.
Ultimately, you need to look at the pros and cons of rent-to-own, consider your alternatives, and make a fully informed choice about whether this approach is right for you.
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