Who hasn’t dreamt of owning a house? I’m sure everyone has, at least once in their lives. The thing with buying a property in the traditional route is that it can take years before you can even start building your house.
Don’t fret just yet! There is an alternative for you to own a home without pouring all your finances in one go, which is ideal for Filipinos whose monthly salaries lie on the average scale. This alternative is known as the Rent-to-Own scheme. These are agreement deals where the buyer has the option to rent the property for a period of time then decide whether to buy the property or not, before the end of the lease.
Now, the question is: should you invest in rent-to-own properties? Read through our guide to learn more about this agreement deal!
What is a Rent-to-Own Property?
To make it very simple, rent-to-own schemes are an alternate route for potential homeowners to invest in real estate. These deals include a standard lease agreement with an option to purchase before or at the end of the lease. This is an agreement deal where both the buyer and seller benefits from the lease. It allows the buyer to test out the place before committing their finances to the property. On the other hand, it will enable the seller to put their property on sale for a higher price than the current one in the market.
Many Filipinos dream of having their own house and lots, but the sky-high price of properties causes them to walk away. This is why rent-to-own deals are popular among Filipino households; they are more affordable, and families can immediately move in after signing the lease contract.
What is the Cost of House and Lots in the Philippines?
If you’re a first-time house buyer, you might think, “Why should I invest in a rent-to-own property when I could invest in real estate the old-fashioned way?”
The answer? Real estate can be expensive. Of course, it depends on the location, accessibility, and size, but you’ll also have to think about other fees that you would need to pay upfront to start investing in a property. Let us break them down for you.
The cost of house and lot properties in Metro Manila ranges from P25,000 to P45,000 per square meter. This makes a 100sqm. property cost from around P2.5M to P4.5M. Depending on the terms of the agreement, you may pay up in installments from 5 to 30 years. Sounds good, right? That’s not all that you’ll pay for, unfortunately. You’ll also have to consider other fees such as the reservation fees and downpayment (usually 10-30% of the total price), and monthly amortization rates (can range from P2,000 to P25,000 depending on the terms of the agreement).
If we’re taking the 2.5 million peso property as an example, you’ll already have to flesh out at least P250,000 upfront before you can pay the lesser expensive monthly installments.
How much should be my Budget?
The next thing you should consider is your budget. You cannot purchase something that is out of your living means. Otherwise, you might find yourself struggling financially. Real estate investments are big, thus needing more planning compared to impulsive purchases.
To avoid any financial setbacks, you should know first how much you can afford. This can be done using the 2.5 rule. Take your annual gross income and multiply it by 2.5. The result will determine how much you can spend on property investments. Another rule to follow is the 28% rule, which states that you should not spend more than 28% of your monthly income on real estate.
Let’s say that your monthly income is P35,000. Multiply it by 13, as Philippine law states that employees must be paid for 13 months/year, then multiply it again to 2.5. The result will be P1,137,500, which should be your maximum budget for a property. Taking the same monthly income as an example for the 28% rule, you should not spend more than P9,800 per month on rent or real estate investments.
You may opt to take it up a notch and buy something more expensive, but remember that you also have to consider other fees, taxes, and of course, your family’s needs.
Where can I get Funding?
When we talk about real estate investments, we’re talking about big money. It can range from hundreds of thousands to millions, depending on what you’re planning to invest in. Let’s face it, though. Not everyone has that kind of money in their savings account. This is where loan programs come in. Read on and find the best match for you and your needs.
Pag-IBIG Affordable Housing Loan Program
The Pag-IBIG Affordable Housing Loan Program is designed for low to middle-income families who wish to buy their own properties. They can lend up to P750,000 with an installment rate of 3% for the first five years. Loans can be paid in installments from 5 to 30 years.
Take a Loan from the PAG-IBIG Affordable Housing Loan Program if:
- You are an active Pag-IBIG Fund member
- You want the lowest interest rates!
Bank Financing
Bank Financing is a type of housing loan where a bank funds your finances when buying a property. While this type of loan offers more security, it can be more difficult for others to get approval. Once approved, banks usually allow you to pay up installments only for up to 5 years. This type of loan has a higher interest than the Pag-IBIG Housing Loan, with an interest rate of up to 7%
TAKE OUT A BANK FINANCING LOAN IF:
- You can pay back your loan within five years.
- You have stable employment status and can meet the required minimum income.
In-House Financing
The phrase “rent-to-own” is a marketing term for in-house financing. In this type of loan, you borrow from the developer or owner to purchase their property. There are no third parties or banks involved, so it is easier to get approval and does not require extensive paperwork. Take in mind, however, that they have the highest interest rates.
TAKE OUT AN IN-HOUSE FINANCING LOAN IF:
- You want to move into your new house immediately.
- If you want easy transactions
- You need a flexible payment scheme
Advantages and Disadvantages of Rent-to-Own Properties
Now that you know the basics of rent-to-own properties and how to fund them, we have now reached an essential step in making important decisions: weighing the pros and cons.
One of the most significant advantages of rent-to-own agreement deals is that you can test out the property before ultimately deciding on buying it. This helps buyers determine if the property is suited for their lifestyle. Of course, another advantage is that if you’ve fallen in love with the property, you will have the right to purchase it.
Another one is that the buyer doesn’t have to flesh out all their savings in one go. As there are usually no third parties involved, the buyer and the seller can come up with a flexible agreement that will benefit both parties. Finally, the best advantage to this kind of set-up is that you can move into your new house right away!
Of course, a deal as good as rent-to-own properties doesn’t come without risks. It is up to the buyer if they are up to face the possible cons of investing in this type of lease.
Buyers would need to consider that the monthly rent is usually higher than the current market price. This is to project a possible increase in property value. It is also important to note that should you decide not to purchase the property, the rent you’ve paid is non-refundable. So, make sure that the one you’ll be committing your finances to is a place you see yourself living in for the next few years!
There are also instances where newly built houses are leased through rent-to-own agreement deals. In cases like these, potential buyers do not have the privilege to choose a location, size, or other features of the property.
In Summary…
- Rent-to-Own agreement deals allow you to rent the property and give you the option to purchase the property before the lease expires.
- House and Lot properties in Metro Manila usually range from P25,000 to P45,000. Make sure that the house you’re eyeing fits well in your budget.
- To determine what properties you can afford, multiply your annual gross income to 2.5. Don’t forget to follow the 28% rule as well. This rule states that you should not spend over 28% of your monthly income on properties.
- You can get a loan from the Pag-IBIG Affordable Housing Loan Program, Bank Financing, and In-House Finance. Find the best loan program for you!
Owning a house is a dream that most people think is quite impossible. What most people don’t realize, however, is that there are alternative routes to being a homeowner! It doesn’t always have to be out of your living means and it doesn’t always have to be too complicated. You just have to find the perfect one that suits you and your family’s needs.