Rent-to-own or buy? It’s down to the cash in hand

What’s the main difference between rent-to-own (RTO) versus buying an affordable home? Why not just build homes below RM200,000 so that most can own one? The difference is whether you have RM34,000 in cash.

Well, that’s the downpayment plus all other fees one must have in cash before considering whether to own a home – even an affordable one. The image below shows the calculation.

Many of the households in the M40 bracket cannot afford the downpayment necessary to buy a home of RM200,000 because many do not have RM34,000 in cash to spare.

M40 refers to the middle 40% of Malaysians with household incomes of between RM3,860 and RM8,319.

The RM34,000 needed before one can consider owning a home does not yet include the cost of all other creature comforts like air-conditioner units, washing machine, refrigerator and perhaps an L-shaped sofa.

This is where the RTO comes in to fill the gap. So, the first gap it intends to fill is the downpayment and all other fees which for a RM200,000 home may total RM34,000.

The second gap the RTO fills involves the aspect of “trust”. Banks usually only lend to buyers they are confident can repay their borrowings. So one must prove they have sound credit ratings.

With the RTO option, tenants have the opportunity to show the bank that they can pay their rental (mortgage) on a continuous basis without lapsing. This helps build their credit trustworthiness with the bank.

If the buyer is able to pay rent without fail for two to five years for example, it is quite safe for the bank to assume that the buyer can continue to pay for the home they buy after the “monthly rental” becomes a monthly mortgage.

The ‘better buy now’ mentality

The third gap is the “better buy now” mentality. There is some merit to this way of thinking because the cost of constructing a home increases with time. Thus, buyers who take the RTO route today would secure the property price at today’s price instead of trying to save faster than the rate that the property price increases.

By the way, there’s nothing to stop us from taking the RTO route, then renting a room to a relative or colleague. The extra rental will come in extremely handy for renovation later once we convert the RTO into the SPA.

In Malaysia, there are a few RTO schemes offered, Houzkey and PRIMA being two such ones.

Should one consider the RTO if one has money for a downpayment ready? One major reason why RTO schemes were made available was because of the downpayment issue.

Thus, if one can save sufficient money to fulfil downpayment requirements, one can proceed to buy even from the secondary market and not necessarily only the homes offered under RTO schemes.

Do note that the most important consideration is whether the home you’re renting is the one you absolutely want.

Charles Tan blogs at property investment site kopiandproperty. He dislikes property speculators and disagrees that renting is better than buying. He thinks it’s either property or poverty. He is presently the CEO of an auction house auctioning assets beyond just properties.