A lot of people consider it convenient to rent and list a host of reasons for preferring this option, for example, uncertain economic circumstances, erratic property values and the financial commitment involved in buying a home. But, given how property prices have adjusted, does it makes sense to continue renting?
Consider this — what if you could rent an apartment for, say, three years and then convert the paid rent into equity towards the sale price? Your rent — generally seen as a ‘dead investment' — could then double up as the large down payment payable to the mortgage lender.
Popularly known as a ‘rent-to-own scheme', this arrangement gives you the flexibility to exit the contract at the end of its tenure if you haven't made up your mind whether to buy the home — and this with no penalty.
Try before you buy
In addition to helping you sort out your finances before committing to a mortgage, a rent-to-own scheme allows you to get a taste of the community so you will know exactly what to expect before climbing on to the property ladder. This means you can see for yourself if the apartment matches your lifestyle aspirations and whether it is well-maintained or not. You also get to know what the owners' association set-up is, and the cost of service fees and utility charges, among other things.
There are several matters to look into before entering into a rent-to-own arrangement. Be careful of the fine print and review contract clauses before opting for a rent-to-own scheme. In particular, check you are not paying a premium on the current market rent and ensure that the sale price is predetermined before signing the contract. This will help protect you from volatile market prices. Also, pay attention to details such as exit clauses, availability of mortgage options, hidden charges and so on.
I caught up with the managing director of Harbor Real Estate, Mohanad Al Wadiya, whose firmhas structured the rent-to-own scheme in two Dubai projects — Skycourts in Dubailand and Sulafa Tower in Dubai Marina. While 700 apartments operate on a rent-to own basis in Skycourts, there are 100 in Sulafa Tower.
Mohanad tells me how the scheme works: "Your entire rent is converted into equity and the sale price is agreed from day one of the contract. We don't charge a premium over current market rates. There are no penalties to exit the contract; you can walk out of the apartment whenever you want."
While the rent remains constant for the first two years, it increases by5 per cent in the third year, depending on the rental index and the Ruler's Decree issued that year.
To sweeten the deal, a 12-cheque payment plan has been thrown in. Even before you realise it, three years' worth of rent will go into the predetermined sale price.
In Abu Dhabi, Elysian Real Estate is offering a similar scheme in Amaya Towers on Reem Island. Rent-to-own apartments in these two residential towers in Shams Abu Dhabi (scheduled to be delivered by the year end) are also linked to mortgages from Abu Dhabi Finance. "It's proving difficult to clinch transactions via the conventional way. So, we're looking at new ways to sell property," says Paul Preston, CEO of Elysian.
One-month rent free
Second year rent Dh48,000
Third year rent plus 5% rental increase = Dh50,400
Hear it from a homeowners:
Mohammad Mishmish: I had initially rented a studio apartment in Skycourts, Dubailand, but then got a call from the landlord, Skycourts LLC, informing me of the rent-to-own scheme, valid for three years.
I opted for two apartments under this scheme: the studio and a two-bedroom for which I pay Dh17,000 and Dh48,000 rent respectively. The rent will be subject to a 5 per cent increase after two years. I am also entitled to a one-month rent-free option for my two-bedroom apartment. My entire rent will be converted into equity and deducted from the purchase price of the apartment.
The sales price is fixed in the contract. But, after three years, if the apartment price goes below the predetermined rate, I can cancel the contract and walk away. We have agreed on Dh700 per square foot as the sales price.
I live in Al Qusais but plan to move to Dubailand with my family once all the shops open. I chose to buy in Skycourts since it is the best apartment complex in Dubailand apart from Dubai Silicon Oasis. I believe banks will finance Skycourts units since the property is completed and a portion of the purchase price has been paid under the rent-to-own scheme.
If you buy a home using the regular process, cash needs to be paid upfront. Also, what happens if you dislike the apartment after one year? Then you have to find the right buyer who meets your price expectations. Under this scheme, I am still a tenant and have the option to become an owner, but it is not mandatory. The landlord takes charge of the building maintenance and service charges.
An attractively framed scheme as tenants have everything going in their favour. Make sure the rent contract is renewable in case you decide not to buy.
I opted for the rent-to-own scheme in 2004 in The Greens in Al Dhafrah buildings. It sounded like a good idea at the time because it was a new concept and since the area was not very developed then, the fixed rate provided me with a good buffer against price increases.
The disadvantages of the programme were the higher than standard rent and also the fact that the project was not well developed back then.
But it was a win-win situation in the sense that I saved one year's worth of rent when I decided to buy. The scheme was structured in a way that I had to pay rent for two years and then if I decided to buy the apartment, Emaar would deduct 50 per cent of the rent paid and use it as part of the price.
Tenants should make sure they read their contracts well. Although I had to pay a premium rent, the deal was good because the sale prices and rents increased a lot, especially during the boom years. I think the price appreciated around 15 per cent. After the expiry of the two-year lease contract, I financed the apartment via Tamweel.
The conversion rate of rent into equity isn't very desirable. Make sure you are not made to pay rent in excess of current market rates.
Rami Nasser, director of sales and commercial leasing at Aldar. Currently, we are offering a select number of apartments at Al Bandar and Al Zeina at Al Raha Beach under the rent-to-own scheme.
This is how we have structured the rent-to-own scheme: a tenant enters into a two-year lease contract with Aldar, where the annual rental amount is fixed for the two-year period.
If tenants exercise the option to buy, Aldar will give them 100 per cent of the first year's rent and 90 per cent of the second year's rent back in the form of credit towards the purchase price.
As an added bonus, the tenant can assign the credit accumulated with Aldar to any other person. Besides, the tenant has the option to purchase the property from Aldar at any time during the two-year lease period.
We were very careful when pricing the scheme to ensure that rates remain attractive to today's tenants, even in comparison with pure rental rates. Given how renting a property is an expense with zero return, this is an appealing option.
Tenants would not incur any costs should they decide not to purchase and they would be in a position to commence another rental agreement with Aldar should they wish to continue staying in the property. The tenant also does not pay any additional service charges during the two-year rental period.
Paul Middleton, executive director of sales and marketing at Sorouh Many of our customers wanted to buy Sorouh's developments but found it difficult to make a large down payment. Also, the economic uncertainty meant many people did not feel secure enough to make a large financial commitment. However, they were not satisfied with renting and felt it was important to get a foot on the property ladder.
Rent-to-own solved these problems by enabling the customer to rent a home and build a deposit over three years. The tenant has an exclusive right to purchase the property, at a set price, during this period at a time that is right for them. The rent-to-own scheme is available on units in Sorouh's Sun Tower in Shams Abu Dhabi on Reem Island. Under the scheme,90 per cent of rent paid will be set aside as equity. By the end of the third year, around 15 per cent of the property will already have been paid for. So, if they wish to complete the purchase by taking an 85 per cent LTV mortgage, they wouldn't need to pay more towards the property.
The rent-to-own properties carry a 5 per cent premium over a standard rental and one-bedroom apartments start from Dh89,000. The rent is fixed for three years and payable in four cheques.
The price per square foot varies by unit type, view and position in the building. The decision to buy or not is completely up to the tenant.
Don't skip the fine print
Before signing a contract for a rent-to-own scheme, make sure you know the answers to the following:
1) Am I being charged a premium rent as compared with current market rates?
2) At what price will I be asked to buy the apartment at the end of the contract?
3) What percentage of the rent I pay will be converted into equity towards the purchase?
4) What are the mortgage options available after the contract tenure?
5) Will the developer pay the service charges under this scheme?
6) If I am not keen on buying the apartment, can I walk away without being charged a penalty?
7) Is the contract one-sided? Does it favour the developer?
8) Will I have to pay an agency fee, transfer fee, registration fee or other fee before signing?