Tips & AdviceRent-to-Own Is a Growing Industry. Is It Right for You?

Rent-to-Own Is a Growing Industry. Is It Right for You?


Housing affordability has long been an issue in our country. The 28/36 rule sets limits on how much of your monthly income should go toward your mortgage payments. Based on the rule, your mortgage payments should not exceed 28% of your monthly pre-tax income and 36% of your total debt. However, as homes become increasingly expensive, many families struggle to maintain their housing costs within limits. In fact, according to RealtyHop’s most recent Housing Affordability Index, 73 of the top 100 U.S. cities are over the 28% affordability threshold. As people grapple with rising owning costs, many are forced to stay renting.

An Increasingly Unaffordable Real Estate Market

Data from Zonda, a real estate research company, found that the effective cost of purchasing a home is roughly 50% higher than just six months ago. Rising home prices are obviously a real concern for first-time homebuyers, but high interest rates are a huge factor behind increasing unaffordability in the housing market.

The average interest rate on a 30-year fixed-rate mortgage at the end of 2021 was 3.11%. As of June 23, it rose to 5.89%. In practical terms, this means that borrowing costs on the same mortgage are 90% higher now than they were roughly six months ago.

An average homebuyer who took a $400,000 mortgage in December 2021 would have qualified for a 3.11% interest rate. Their monthly payment would have been $1,710. Now, with a mortgage rate of 5.89%, the person would have to pay $2,370 a month for the same loan, 38.6% higher. Despite paying more for the same loan, the current homebuyer who took out a $400,000 mortgage would have to settle for a less desirable property since housing prices are up around 8% in that timeframe. 

With fewer Americans able to afford a single-family home, more and more stay renting. If you’re currently renting but hope that you can one day own the home you’re in, there are some untraditional avenues you can follow. 

How Rent-to-Own Programs Work

Some companies and investors hopped on the single-family rental bandwagon by purchasing homes they can rent out to tenants. In this situation, tenants rent a property with the option to buy the house later. Rent-to-own startups such as Landis Technologies, Divvy, and ZeroDown decided to try a similar but different approach that helps people who can’t afford a home right away. They market their business as an “affordable homeownership” option. 

Compared to traditional loan programs, these homeownership programs often have lower credit and income requirements, as well as lower upfront commitment – 2% of the purchase price vs. 20% down payment with a traditional loan.

For applicants who qualify, affordable homeownership companies will purchase a home on behalf of their clients. The client will work with a real estate agent to pick a home that works for them, but the company will put an offer in and buy the property while taking care of closing costs, inspection, appraisal, and all the paperwork.

The client will then rent the home from the affordable homeownership startup, with the option to buy within a set timeframe. Part of the rent will go toward the home equity as long as the client purchases the property within the agreed timeframe. 

Who Should Work With a Rent-to-Own Startup

Rent-to-own is a solid option for people who want to buy a home soon but aren’t able to at the moment. To qualify for a homeownership program, you must prove that you can cover the monthly rent and can purchase the home down the line. The Landis homeownership program, for example, allows tenants to rent a home for up to two years before they either buy or vacate the property. 

This type of homeownership program may be a good option for prospective homebuyers who don’t have enough money saved up for a traditional down payment or have insufficient credit to qualify for a mortgage. While renting from an affordable homeownership company, tenants will save up for a down payment and build up their credit until they qualify for a mortgage and can put enough down payment on the home. Rent-to-own allows tenants to put some of their rent money into their future down payment, with the added security of staying in the same property after the transaction. 

The Downsides of Rent-to-Own Programs

Rent-to-own programs are a good opportunity for prospective homebuyers who need anywhere from a few months to a couple of years to sort out their finances and credit. However, this agreement has its downsides. 

The major drawback to such an agreement is a lack of flexibility. Anyone who enters a rent-to-own contract must be completely certain that they have the desire and ability to purchase the home within the agreed-upon timeframe. If the tenant doesn’t buy the house within a set time or decides to back out of the deal, they will have to pay an exit fee. Landis, for example, charges a fee worth 3% of the selling price of a home. For a $500,000 home, that would total a whopping $15,000. 

There is a vetting process to ensure that applicants are qualified and financially able to build up their credit and savings for a future home purchase. Still, life isn’t predictable. Suppose uncontrollable life circumstances hamper a tenant’s ability to purchase the home within the set timeframe. In that case, they may find themselves in a worse financial position at the end than when they started. 

Additionally, while real estate properties tend to appreciate over time, it’s not 100% the case. In a world where the economy is heading toward a recession like we are in today, there is a chance that the property will become less valuable when the renter is ready to purchase the home. Most of these rent-to-own programs have set rules protecting their margins, and the clients are the ones who have to eat up the loss. Divvy, for instance, highlights that the buyback prices are non-negotiable. Landis, meanwhile, adds a premium of 3% to the property’s appraised value in the first 12 months and up to 6% total in 24 months.


Amid skyrocketing home values and rising interest rates, rent-to-own programs have become an increasingly popular option for those who don’t have enough cash saved up for the down payment. However, these homeownership programs are not for everyone. You should always explore traditional mortgages first if you can qualify for one. The Federal, state, and local governments also have first-time homebuyer programs available to buyers looking for down payment assistance or favorable loan terms.

Tyler Williams
Tyler Williams
Tyler graduated from Virginia Commonwealth University in 2017 with a Bachelor's degree in Urban and Regional Studies. Currently based in Los Angeles, he works as a freelance content writer and copywriter for companies in real estate, property management, and similar industries. Tyler's main professional passion is writing about critical issues affecting big and small cities alike, including housing affordability, homelessness, inequality, and transportation. When he isn't working, he usually plans his next road trip or explores new neighborhoods and hiking trails.

Recent posts