When Christian Fracchia first heard of rental properties four years ago in Port Moody, British Columbia, he figured out how to make his dream of owning his first home a reality and entered his name in a 30-unit lottery.
Of the 358 units under construction at 50 Electronic Avenue, approximately 10% have been sold as rental properties.
A week from now, Fracchia, a 28-year-old software developer, will be touring a new one-bedroom apartment near the Skytrain and seaside park. All this for a $10,000 down payment and $1,000 monthly rent, and after two years he will have a $470,000 down payment.
“It’s basically like two years of free rent. That money. [I pay now] As long as the sale is complete, I can keep,” said Fracchia, who plans to move in with his wife in a few months.
Renting is a unique way to homeownership that delays one of the biggest hurdles for new homebuyers: a large down payment.
Proponents say this model of mortgage lending allows people with limited or damaged credit who can’t qualify for a traditional mortgage to work toward ownership. increase.
Critics, however, warn that there are some pitfalls and risks, such as maintenance costs and possibly the possibility of losing the down payment if the renter fails to meet the terms of the contract.
Canada is funding such projects by creating a rental housing program as part of a $2 billion spending to double housing construction over the next decade. Approved for previous budgets, the funds will help her 17,000 new homes across the country, including faster housing for people who are homeless or at risk of becoming homeless, and affordable market-priced housing projects. intended to create.
$200 million in rental funds
Of that $2 billion, $200 million has been allocated to new leasing programs. Prime Minister Justin Trudeau said at a press conference in Kitchener, Ontario, that the fund, administered by the Canadian Mortgage and Housing Corporation (CMHC), will help first-time homebuyers as developers and builders are overwhelmed with down payment requirements. He said he encouraged the creation of more opportunities for , August 30.
“For many renters, saving to buy a home is becoming increasingly difficult. Through this new program, we are working with home providers to help families move from rent to home ownership. I will,” said Trudeau.
Applications for the 5-year Affordable Housing Innovation Fund and its new Rent-to-Own stream opened August 30 to local governments, developers, builders, community housing organizations, non-profits and Indigenous organizations .
In 2018, when the Panacci Group offered rental properties in Port Moody, 500 people applied.
Richmond, British Columbia-based developer Kush Panatch said he had never offered a rental property before and was shocked by the enthusiasm.
After reviewing the essays, he decided to invite only Port Moody applicants to a kind of lottery. The essay also included an essay from Fracchia who wanted to stay in the community he loved.
Panacci, while excited, warns that renting to a home isn’t always the path to perfect home ownership.
“We learned a lot doing it. Unfortunately, there were some nasty surprises,” he said.
He found unexpected costs, like the fact that his company had to cover the cost of GST from the moment the renter moved in until he bought the unit. Likewise, there were complex legalities to navigate. Rising interest rates also increased the cost of the program, Panacci said.
“I think support from both the federal and state levels will go a long way in promoting programs like this,” he added.
how does that work?
The terms of rental agreements vary. Generally, an agreement between a renter and a property owner or investor to purchase a home at a set price by a future date. A contract consists of lease and purchase options.
The idea is to hold the property for potential buyers until they can save what they need to qualify for a conventional mortgage with a lending institution.
Rachel Oliver of Clover Properties, north of Toronto, runs a private rental program she says has helped 600 Ontario families “rapidly track their ability to move closer to owning a home.” .
According to Oliver, renters typically pay a lump sum down payment (her company typically requires $20,000) and then pay a monthly fee based on the amount needed to get 10% of the property’s purchase price by the end of the month. pay the monthly rent calculated by their tenure. Monthly rent is also calculated based on the cost of maintaining the property at today’s interest rates.
“This is basically forced savings. We will sell the property in phases,” Oliver said.
Tenants often also cover the cost of maintenance and upgrades to the home or condo during the rental period.
Why rent to own?
At the start of the lease, customers can lock in the purchase price of the home at $600,000 and plan to buy it within five years, Oliver said. If the property value rises to $650,000, the lessee can keep the added value of the contracted home.
In the meantime, the investor, or possibly the developer, holds the mortgage. Rent-to-Own contract rents can fluctuate but are currently generally in line with market value rents.
Oliver and her husband work with investors who take on the burden of debt until the borrower accumulates assets and becomes a first-time owner.
Clover Properties is expanding into Alberta and Quebec as families increasingly need to own a home before prices get too high.
Rent-to-Own is ideal for renters who are struggling to get mortgage approval because they have low income or damaged credit, according to Oliver.
But the devil lies in the details of the deal, she warns, which she says works with buyers and investors to ensure success and avoid investors “getting greedy.” The reason is.
Meet the conditions or lose the down payment
Oliver also mentions having to commit to rent to the owner. During the pandemic, she says some of her down payments were lost because her family’s breakdown and other hardships forced clients to walk away, unable to honor her contracts.
“If they stop paying on time or stop paying the contract amount, it is a breach of contract. We will do our best to work with the individual in this situation.We have exhausted all options.” If…they have to leave the property…they lose the down payment credit,” said Oliver. “That’s why we screen so rigorously.”
Also, unlike regular renters, renters are often responsible for maintenance and upgrades.
Oliver applauds the government for exploring unconventional homebuying tools, but a new federal fund focuses on development projects, allowing rental home owners to shop on the open market for resale homes I am disappointed that I am not allowed to do so.
“They’re basically subsidizing the developer. Hopefully the builders will pass the savings on to the end user in a fair way,” said the developer to manage the complex contract. Oliver said he believes he should work with experienced renters.
New path not well tested
Homeowners advocates say rent-own-yourself programs are running in parts of the UK with some success.
However, as is the case in large Canadian cities, UK real estate is so expensive that bridging the gap between low wages and homeownership has proven difficult, and there has been no significant adoption.
Paula Higgins, chief executive of London’s HomeOwners Alliance, said there were several problems with London’s building safety regulations being weak and rent-to-owner financing leading to new developments. said. Some of these units built for renters were of lower quality because developers cut costs but collected subsidies, she said.
If Canada wants to get into the rent-owning game, Higgins offers some advice.
“I’m very careful about creating developer-driven systems. It helps them, but it doesn’t help renters.”
Higgins said it was important that high-quality, affordable housing be built, and only high-end properties that would attract investors and eventually be resold for profit, ultimately crowding out local families. is not.
Gary Schwartz, president of the Canadian Association of Firms, said collecting a first home down payment was too high a hurdle for many, given soaring real estate prices and inflation.
“Saving a 20% down payment is too much of a burden for many first-time buyers and they are stuck in the rental cycle,” Schwartz said.
“It is exciting to see CMHC develop programs that can accelerate innovation in the rental housing sector.”