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In Malaysia, the dream of homeownership is now more attainable thanks to innovative solutions like the Rent-To-Own (RTO) scheme. This unique approach offers a practical alternative for those who find immediate property purchase challenging. Here’s a breakdown of what the RTO scheme in Malaysia entails and how it benefits prospective homeowners.
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What is Rent-to-Own (RTO)?
Rent-to-own or rental-purchase is relatively less known in Malaysia but has been around overseas for decades. One of the first RTOs in Malaysia was not property related, but instead a business model renting out furniture which started out in the 1950s. Rent-to-own for properties took off in the 1980s until today where millions of customers around the world choose rent-to-own.
Rent-To-Own is a program where you rent a property for a specific period, with the option to buy it before the lease expires. This scheme is particularly beneficial for those who currently can’t secure a mortgage due to financial constraints. It’s a bridge between renting and owning, providing a gradual path to homeownership without the immediate need for a hefty down payment.
A rent-to-own agreement allows the buyer the option to buy the rental property at a future date. In the meantime, the property buyer is also a home renter for the property and makes regular payments to the real estate seller.
How Does RTO Work in Malaysia?
Under the RTO scheme, a potential buyer enters into an agreement to rent a property for a predetermined period, typically five to ten years. During this rental period, a portion of the monthly rent goes towards the future purchase of the property. At the end of the rental term, the tenant has the option to buy the house at a price agreed upon at the start of the lease, utilising the rent contributions towards the purchase.
Rent-to-Own Pros
Low or no down payment required for the property
The scheme eliminates the need for a substantial initial down payment, making it easier to start the journey towards owning a home.
Start right away
Able to start on process towards owning a property even if currently unable to qualify for a home loan.
Locked-In Purchase Price
The purchase price is fixed at the start of the lease, protecting buyers from future real estate market fluctuations. So the property purchase price locked in at today’s pricing and enjoying future price appreciation.
Time to Build Financial Stability
Able to stay in the property before deciding on property purchase decision. The rental period provides time to improve credit scores, save for a down payment, and build overall financial stability.
Trial Period
Living in the property before buying allows you to ensure it’s the right fit for you and your family.
Rent-to-Own Cons
- Forfeiting money paid for the “option” of buying the property if you decide not to buy.
- Risk of being unable to qualify for a loan at the time that you want to buy the property.
- You are not the owner of the property (yet) and cannot renovate or make any changes without the owner’s approval.
- Property prices may unexpectedly fall lower than the price locked in at today’s pricing.
Considerations for Prospective RTO Participants
While RTO is an attractive option, it’s important for potential participants to consider a few factors:
Understanding the Terms
Ensure clarity on terms, including rental rates, the portion of rent credited towards the purchase, and responsibilities for maintenance and repairs.
Property Valuation
Understand how the property is valued and how it compares to the market rate.
Exit Options
Know the implications if you decide not to purchase the property at the end of the lease.
Should I Opt for Rent-to-Own?
You should consider rent-to-own if you are unable to get a home loan, or pay for the down payment, but you are confident of having the monthly cashflow for the monthly payments.
The difference between a full property purchase down payment is approximately 10% of the property price versus 1-2% for the property price for 3 months rental down payment.
The choices for rent-to-own properties are limited in Malaysia, but there will be more RTO property projects launching in Malaysia soon.
