She's On The Money - Rent to own properties, are they a good idea? (spoiler: no)

Episode Date: November 16, 2021

Property is the Great Australian Dream, and a topic we ALL love talking about - even if we don't want to own property ourselves. This week on the show G and V share the pros and the con's of rent to own property strategies, and why you might want to potentially avoid them.The advice shared on She’s on The Money is general in nature and does not consider your individual circumstances. She’s on The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Victoria Devine is an Authorised Representative of Australia Pacific Funds Management Proprietary Limited ABN 34 132 463 257 - AFSL 339151.See omnystudio.com/listener for privacy information.

She's on the money. She's on the money. Hello and welcome to She's on the money, the podcast for millennials who want financial freedom. Over the last 12 months, housing prices in Australia have increased by 22%. While this is incredible news for the homeowners, it's more than a little deflating for aspiring first home buyers who are yet to have cracked the market, like my good self. But what if there was a way that we could get into the property market without needing a deposit from the outset by

entering into a rent-to-buy scheme? My name is Georgia King and joining me to explain exactly you what renting to buy is and whether it's our ticket to home ownership or if it's a trap best avoided is, of course, Victoria Devine. Firstly, what's up, G? How are you? I'm so good, my good friend. It's episode 201 today. Oh my gosh, I'm so excited. Monday was Money Diaries and that was our 200th episode and I really wish in the moment I had like foreseen that that was gonna, yeah, like I just didn't even mention it in the episode, which is arguably really disappointing, but happy 201, Georgia King. Happy 201, VD. Okay, let's get straight into it. What is renting to buy exactly, V? Because I have not heard of this concept before.

So, a rent to buy scheme is like a lease agreement that allows you to pay rent and leave in the home that you will eventually want to buy for a fixed price and time period agreed upon by both you and the seller of the property at the time of signing the contract. So, in addition to paying rent G, you'll also be paying the option to buy fees for the duration of the agreement and to the amount that was agreed upon by both parties. When the leasing period that is stipulated in your contract ends, which is usually between three and five years, the home's then yours and the mortgage is transferred into your name, which sounds like a dream if you say it that way. It does so far. I know. It's just like, that's genius. But what this means is that people who can't get into the

housing market in the traditional ways by saving for a deposit and then paying for their own mortgage have a different way of entering the market. And this could be good and it also could be bad. And they are theoretically locking in a set price with the homeowner at that period of time, like three or five years in the past compared to when they'll purchase the property, which given the current growth is not a bad thing to have done, right? But essentially, it means that they can then save for a deposit over that three to five year period and put themselves in a better position to afford a mortgage. Often buyers do still have to pay a non-refundable deposit to get into this. So, it's not all completely cash free and you don't

just turn your lease into an own situation. But essentially, you need to make sure you know the semantics of that relationship before we actually get into it. Because rent to buy can sound really attractive because let's be honest, as you said it before, the markets in Australia at the moment are technically cooked and it makes us all feel a little bit deflated when it comes to things like talking about when we can get into the property market or what it means for us when you're saving and maybe you're able to save 11% of your income each and every single year. To then hear that the increase in property prices has gone up 22%, that's literally double what you're able to save. So, like, that means that you're not going to be able to catch up. And that sucks, G.

Yeah, well, it does suck. And I definitely understand why people are turning to these kind of alternative ways of getting into the property market. But what are the other draw cards of this style of home ownership be? So, obviously, the main draw cards are that it makes it a lot more accessible and we aren't required to save for a deposit straight away. So, it gives you a bit more time to lock in finance with a lender and get that organized. in saying that, gee, three slash five years, depending on how long you're entering into this, it's a long time. Anything could change. Like you might enter into this agreement and have a partner and then break up with your partner. You might enter into this agreement and then two years down

the track, decide to make a complete career change and go back to uni and change your income significantly, meaning you might not actually get finance with a lender. So, it can be a little bit constraining and we need to be really aware of that. And as I was saying before, there's obviously like that rent phase, but then there's the buy phase. So, there's two phases in this process or this program or this scheme as we're calling it. And it's really important to understand what the semantics of each phase mean and how it can actually impact you. Because during that rent phase, you don't actually have any legal right to the title of that property. Even missing like rent for one week can result in having the contract completely terminated and you will lose all the

money that you've spent thus far. It's a contract at the end of the day and you've got to know what you are agreeing to before entering into it, but back to options. The next major benefit is that it might be a good deal for the buyer. I mean, as I alluded to before, property over the last year has increased significantly, which means that you could be locking in a lower amount than the buyer might get if they sold in five years, which is a bit of a money win because also if we look at property in general as a financial advisor, and I put that hat back on, if you're going to make an investment, you would want that investment, whether it is property, bonds, shares, whatever it is, to double in value every 10 years, you're halfway there with five years. So, that's pretty

good. But then again, some people think of rent money as dead money, which as you know, G King, we don't agree with that we do not agree with that we do not stand that we also don't believe that you need to buy property to be financially successful just putting that hat on for a hot second we did an entire episode on renting for life and that's actually a really attractive option if property isn't something that you want but as you guys know property is a very popular topic in our community so it makes sense that we're doing another episode on it because we give the people what they want georgia king we do we do we're just so generous honestly but some people think of it as dead money going back to my point but by renting to buy some people can

actually justify renting a little more because it can lead them to their main goal of attaining home ownership and knowing that part of their rent is actually being turned into equity is pretty sexy. Yeah when I was having a little peruse on the google before the show I noticed that a lot of the the companies that specialize in this area really talk about rent money being dead money so they're like instead of you know wasting your rent turn it into home ownership like that's a big a big selling point that they really lean on but how true is it not sure look it's not I really want to put the term rent money is dead money straight in the bin because I just don't agree with it like you're paying for a lifestyle you are paying for a roof over your head it is not

a negotiable cost like I feel like it's an incredibly entitled thing to say rent money is dead money. It's like, okay, so should I just live on the streets? Like not everybody has the privilege of staying at home and saving for a deposit. Not everybody even has the privilege of having a safe home to be in. They need to pay rent like we all do. So, I just feel like it's a really outdated term to say rent money is dead money because it's just, babe, it's letting your entitlement show and we don't want that in 2021. Yeah, could not agree more. So, what are the benefits for people selling their homes in this way? So we are having this conversation. I just want to stipulate because I'm going to get my negative hat on in a hot second. We're just

presenting the benefits and the negatives. But I mean, at the same time, I think it's really important for you guys to understand that I would err further on the side of caution when it comes to rent to buy. And I'll explain why, because it's actually illegal in a few states, but don't tell anybody yet. But when it comes to the benefits for people selling their home, they have a guarantee buyer for their home. How good is that? Like, you know that that home is going to sell. I mean, in this market, it's probably not that much of a draw card anymore, but historically it would have been because it used to take months or even years to sell particular properties. And they will arguably receive more money than they would have by just renting their home out

in that period of time, the old fashioned way, as they're going to receive not only inflated rental prices, but also that option to buy a fee, which is essentially in lieu of a deposit. And then also when it comes to risk, obviously it's quite risky for the buyer, but for the seller, if the buyer fails to secure finance at the end of the agreement, they actually get to keep their home and all of the money that they made along the way. So there's not actually all that much risk on the person who's selling the property, because if it doesn't work out, yes, maybe you don't have a buyer for your home, but you get to keep your home. You get to keep the money that they have paid you over that three or five year term. You're not just keeping the rent money

because that would have been arguably yours regardless, but that option to buy fee completely sacrificed from the person who's buying it. And that's the risk you go into. And more often than not, that option to buy fee is usually somewhat equivalent to a deposit. So it's not just a $50 Fiji. It's almost equivalent to a house deposit that you could potentially be losing as the person buying, but a money win if you're the person selling the home and it all falls through. Oh, you'd feel a little bit like a little bit of an asshole though, wouldn't you? You would, you absolutely would. But I don't think that that's the problem when we're talking about risk versus return. Like when it comes to investing or selling a property, it's not,

I mean, we don't want to be assholes, but we do absolutely want to make sure that we're putting ourselves in the best possible position to get the best possible financial outcome, right? Like, we're not selling our property so that we can be charitable. Like, arguably, if you're selling a property, especially a property that someone is renting and then going to purchase from you, it's probably an investment strategy from your point of view. So, it's not as though that's your only home. Like, you probably have a couple. Anyway, I won't go on about that, But I just think that it's fraught with risk, George. V, perhaps this is a silly question, but are these sellers just people like you and me?

Or are they more like developers that have companies that are specializing in this? Or is it a combo? Poor kin or lost dos, Georgia King. All right. It can be both. So, finding homes this way is actually relatively uncommon. You know, you don't go on domain or realestate.com and then see a home and it's a rent-to-buy version. Like you do have to be seeking this out and it's definitely more rare in regional and remote areas. So, it's not that

common if you were like living in Wodonga, but it might be really common in Melbourne CBD where they've built a really big apartment complex and the developer's plan is entirely rent-to-own, which is not uncommon. So, I do feel like it's more common in the city than it is in the country, but there are also businesses that specialize in this type of service. Like literally businesses will build an entire apartment complex with the intention of having everybody in that complex rent to buy because they might feel like they'll make more money that way, or that's just the investment structure that they've decided to take on. In saying that, there are legitimate versions and there are also scammers who do the same thing. And you're like, oh my gosh, that's so exciting.

That sounds like a dream. And it doesn't work out that way. So, please, please, please do your due diligence and listen to the property playbook. So, you know what due diligence actually is. True, true. Good little throw there. So, say I'm living in Carlton North and I love my apartment and I'm like, rent money's dead money, baby. Could I have a chat to my landlord and be like, hello, Max. What are your thoughts on renting? Oddly specific. Yes. Max can be approached to do that. Okay. Yep. You can absolutely approach Max and have that conversation if you wanted to. In saying that, it's not that common for pre-existing homes to do that. Right. Because if I wanted to sell my property, G, so pretend I was Max and I said, oh, I'm ready to sell.

Am I going to want to pick Georgia who's just come to me and said, hey, I'd love to do a rent by, don't have any money, don't know if I'm going to get funding after this three or five years, going to pay you an increased amount right now. Or you might go, well, my name's Max and I've read news.com.au, can see that property prices have increased 22%. Do I want to make bank right now and actually sell and get the deposit and the full amount for that property now and invest in something else? Or do I want to wait three or five years for Georgia to get it together? like I don't mean that in a negative way we just have to put our different hats on as to why that might be a good decision and they might go oh yeah like that sounds nice and they just

enter into that because it's a simple agreement from their end in terms of yep you have that fee you pay that continue paying rent and then after three or five years the property will be purchased by you could be a really good strategy for people who want to retire and will need to liquidate assets to retire. Also, I've seen this strategy work for families who own property and their children are purchasing that property and want them to purchase and have the best possible way to do it. So, they live in the property and set up this agreement because it all needs to be, you know, above board and legal. But yeah, from my perspective, it's not that common when it comes to pre-existing dwellings. Right. Okay. But you could still have the chat with Max.

You could absolutely have the chat with Max. Let's go to a break though, because I used the word dwellings and that's kind of weird. Dwellings. Yeah. A good place to leave it. But on the other side, guys, we will be talking about the other side of renting to buy. That is, of course, what the negatives are. And we'll also be covering some alternatives to renting to buy. So, don't go anywhere. Okay, Vee. So, for me, the word scheme, it sets off alarm bells. What are the downfalls of renting to buy? Look, let's be honest. There are a lot more than there are benefits. And maybe we should have said that in the first half of this podcast because Georgia, there are probably some people listening who are like, sounds like a good idea.

Oh my gosh, this is genius. Sounds great. And I'm like, don't do it. So apologies if that was you, but we exist to help. Doesn't mean we go in the like a straight line to do that. But essentially, yes, there are a number of downfalls. The biggest one is that you don't actually own the home in any way, shape or form until the final payment is put down. So if you miss a payment, the contract could be completely terminated and you're left with nothing. And I covered that earlier. Like that's almost a house deposits worth of money. Also, if you reach the end of the rental period and you aren't able to lock in finance for whatever reason, then you could lose both the home you were hoping to purchase and hoping it would be yours and the inflated rental and all

of the option to buy now payments that you made along the way for nothing, which kind of sounds really scary. As I mentioned there, paying rent in these homes is usually more than you would pay for a similar home in a similar location. Again, rent money is not debt money. Say it after me, guys. The other thing that they don't usually publicize is that if the seller of the property is using that property as security for their own debts, it could compromise you if their home was for whatever reason. I don't like that. Yeah. Yeah. So think, you know, Max, no idea who you are, Max, but oddly specific, I'm led to believe that maybe that is your landlord's name. If Max had like debt up to his eyeballs and was doing this thing with you and then he had to declare

bankruptcy and lose his home, your contract doesn't matter. I don't like that at all. No, that makes me feel really icky. Like that's really uncomfortable. Arguably, you shouldn't be able to do that. But if you're in that situation, I would be asking about the seller's debts. No, you are not overstepping the mark. You deserve to know because that is a ramification that could impact you significantly. You also have to apply for the home loan when it comes to buy. So like this isn't just some dreamy process where it's like, oh my gosh, you'll just end up owning it. Like you have to apply for a mortgage. And if you're in a situation where your income isn't going to be sufficient to service a mortgage, or for some reason,

you know, maybe you started your own business. More often than not, Jay, banks want at least two years worth of financials if you're self-employed. So, if you, you know, in a couple of years start your own business and then you're, you know, nine or 12 months into that business, not many banks are going to want to lend to you because you're too risky. And that makes sense, but like it's not something you should have to think about during the home buying process. Yeah. If you're like in this contract, you're like, yep, that's all done, dusted, set up, will own this in this period of time. No, no, no. You still have to get a mortgage and you still

have to be approved for it. Nothing is guaranteed. What about fee? You know how you're paying the rent, which is usually inflated. It's more expensive than it usually would be. Then you're paying the option to buy fee on top of that. What does that option to buy fee get you? Is that contributing to the deposit or is that just the fee of being a part of this type of a scheme? How does that work? It's the fee that the seller would come up with. And essentially, that's in lieu of a deposit. So, your inflated rent and the fact that you're paying this fee is going to add up hopefully to somewhat close to a deposit for them so that you actually can say to the lender, because you're never going to get 100% mortgages without a guarantor,

you can say to the lender, I've actually already, quote, saved this amount for the deposit. it. They already have it. I technically have paid my 10 or 20% or whatever it is towards this property over the last three or five years. And they'll go, great, no problems. We'll see that as your deposit. Does that make sense? Yeah. Gotcha. Okay. All right. But it's also worth noting G that there was a report that was completed in 2016 by the very fancy sounding consumer action law center. And they had found not any successful cases of renting to buy and reiterated that it is extremely financially risky and the legal protections for buyers were quote grossly inadequate that's scary that is that's just i don't know red flag i wonder hopefully

it's like improved in the last five years but that's that's a pretty damaging quote that's it's not just a damaging quote it is a rearing red flag for me like gee if you're in the she's on the money community, it's crimson. It's a crimson red flag. So, are you saying that you would generally caution against this? You're not recommending it to any of your clients? Absolutely, I'm not recommending it. After doing a whole heap of research and understanding it, as I said before, I do have clients who have implemented this with their children to make sure that their children actually save for a deposit and maybe they're not the most responsible people. And I get that. And maybe that works in a family, but I just can't as a

financial advisor, give you the advice to say, hey, I advocate for this because I don't, and I'm very risk averse. And I just feel like if you are going to enter into one of these schemes, I absolutely would be getting independent financial advice, independent legal advice, and making sure you were doing your due diligence to the nth degree before you even sign a thing. But I think it's also worth remembering the quote, it was extremely financially risky and the legal protection for buyers is grossly inadequate. That's an O for me, George. It's pretty clear. Also worth remembering that you don't need to get into the housing market tomorrow. If that's your goal, if your goal is to buy a home one day, you don't need to rush into

it. Take the time, save for your deposit over the next 10 years. Like, you know, property is always going to be there. This is a conversation, G, I actually had in my DMs this morning and someone was saying like, oh my gosh, thank you so much for like your renting forever episode. It really opened up my eyes to the fact that I don't need a property to see myself as financially secure. And I think that because so many of us go, oh, our parents did it or the last generation did it, or there's a lot of societal pressure going on. I feel like it's become quote, the norm to buy property when in reality, it's not actually the norm to buy property. Like it's not actually that obtainable, especially for millennials who have average wages. And the average wage in Australia

is between 60 and $85,000. Like combine that, you still have an income of combined if you have a partner of less than $200,000. And the idea that you would then need to service a mortgage of arguably in Melbourne or Sydney, and obviously I'm not speaking for the entire country here, but of about a million dollars, it's completely unfathomable. Like it is so much money and you go, is there something better? Is there something different? Like why are we putting this pressure on ourselves? Is it because we genuinely want a home? Okay, let's work towards that. But there's no, oh my gosh, you need to be buying a property before 30. Like that's not a thing. Like a lot of homebuyers in Australia and you know we don't know this research yet because a lot of millennials

aren't yet in the property market and I would not be surprised gee if over the next few years research starts coming out saying that the average age of a first homebuyer is closer to 40 because that just seems more reasonable and as someone who is a financial advisor and I have a mortgage broking business and I work really closely with brokers most of the people I'm talking to are 35 plus because that's how long it's taking to save for deposits. And I see all this research flying around about, oh, it takes three into five years to save a deposit. For who? Like, who is actually, especially if you're an inner city person like we are, G, who's saving an entire home deposit in three to five years? Like, if you have literally props to you, I'm so genuinely impressed,

but I'll almost bet my bottom dollar that you guys are not buying inner city Melbourne homes. Like you're not buying in Sydney. You're maybe a little bit more regional. You might be in Tasmania or you might be in Queensland. And that's not to downplay that achievement. That's an epic achievement. But what we want to actually do is normalize the fact that it's not that normal, especially in major cities, to be able to afford property under the age of 30. Anyway, thank you for coming to my TED Talk, Jordan. No, I think you're exactly right. And I think it's probably a good time as well, just to kind of mention that it's worth reflecting on what you do want from your life and kind of questioning if you do have your heart set on

property. Thinking about why, why is that? Like, is it just because Janine on Instagram just bought a hot house down the road and you're like, oh, that would look good on my grid. You know, think about what you what makes you happy and the life that you actually want instead of you know looking around you put your blinkers on and just yeah have a little think have a little thing stay in your own lane because if you're not in your own lane the path is going to be really crowded if you're trying to be on the same one as everybody else exactly right oh that could be an inspirational quote if we cleaned it up gee pop it on let's go let's go let's go honestly that is all we have time for georgia but as always just before we head off we'd like to acknowledge and pay respect

to australia's aboriginal and torres strait islander peoples they're the traditional custodians of the lands the waterways and the skies all across australia we thank you for sharing and for caring for the land on which we are able to learn we pay our respects to elders past and present and we share our friendship and our kindness and remember guys that the advice shared on she's on the money is general in nature and does not consider your individual circumstances She's on the money, exists purely for educational purposes and should not be relied upon to make an investment or a financial decision.

And we promise Victoria Devine is an authorised representative of Australia Pacific Funds Management, Proprietary Limited, ABN 34132463257, AFSL 339151. Hey, Jay, you sound like you've got that pretty down pat. You reckon? Yeah, I do. I still have to read it. Okay, good, because I'm changing it soon.

Bye. Catch you guys.