Private equity powerhouse Blackstone recently invested $6 billion in one of the biggest suburban bets in recent history. In July 2021, Blackstone purchased America’s largest rent-to-own (RTB) company, Home Partners, which owns 17,000 homes across the country. The rent-to-own model has been around for years, but with Main Street now investing real money in this financial model, it could alter the consumer real estate market and change the path to homeownership. for the average American.

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The model is quite simple. Companies are gobbling up thousands of homes and putting them on the market as “rent-to-own” – meaning you enter the house as a tenant, but with the option of buying the property directly from the owner – or to the owning company – at a future date.

Lease-to-own works for investors and future owners

With demand for homes skyrocketing and inventory dwindling, the rent-to-own model has become very popular during the pandemic. The president of digital real estate platform Home Qualified, Ralph DiBugnara, told GOBankingRates in a note that he thinks investment banks are betting on the rent-to-own model due to the increased focus on the rental of single-family homes, as well as the strategy expressed. to earn a higher rate of return on related investments.

The return on investment generally favors the investor. In these types of arrangements, a portion of the tenant’s monthly rent is used to pay a down payment on the home. The price at which the house could be sold to the tenant is agreed in advance and the percentage of your rent that goes towards the actual down payment is agreed in the contract. It is important to note that the monthly rent a tenant pays in these types of arrangements is higher than the actual market value (i.e. what a normal tenant would pay to simply rent the house).

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The percentage of rent that goes towards a deposit in such an arrangement depends on the specifics set out in any attached contract. As a reminder, the monthly amount paid by the tenant is higher than the fair market value, because the extra money is used for a possible down payment. This arrangement can be beneficial for a potential homeowner who wants to slowly save up for a home while living in it, but it comes with risks. According to Rocket Mortgage, the biggest downside to rent-to-own homes is that you’ll lose all the money you paid the landlord in rent if you choose not to buy the home after all.

“If the cost of the lease-to-own option is not based on an above-market rate on rent or final financing of a home, then it should be considered a real estate purchase option,” adds DiBugnara. He also recommends taking a look at homebuyer grants or city and state programs that help first-time home buyers first.

Real estate inventory still poses problems for the housing market

The past two years have shown that affordability hasn’t necessarily been the issue for homebuyers, but rather inventory.

This housing shortage was largely caused by an exodus of people from city centers to the suburbs during the pandemic. Suburban homes were selling faster than buyers even had a chance to think about their decisions, and well above the asking price.

The 2021 housing market will likely go down in history as one of the most frantic real estate markets ever. Crystal Sunbury, senior property analyst at audit, tax and advisory firm RSM, told GOBankingRates that the median price of a home rose 13.9% from November 2020 to November 2021 – to 353,000 $ – homes selling in 18 days on average.

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The preferences of an aging millennial population have also changed market preferences, and Wall Street is taking notice. Paraag Sarva, CEO of tenant-focused financial services company Rhino, says Millennials and Gen Z no longer see traditional homeownership as a realistic or responsible financial decision and that “there are other ways to accumulate wealth that were unavailable to their parents, such as hitting the stock market through accessible mobile apps and investing in alternative currencies. Along with soaring prices for home purchases, rent prices have also risen this year, Sarva notes.

“With the cost of rent rising significantly over the past year, we can expect to see the real estate market continue to follow a rent-to-own trend,” he concluded.

Blackstone continues to buy houses en masse

Blackstone, in particular, is one of the biggest players in the business lease-to-own space. In 2020, the New York Post reported that Blackstone-owned Invitation Homes was spending $150 million a week buying rental homes and then trading them to potential buyers for above-average rents.

The supply of single-family homes has dwindled during the pandemic, but that doesn’t mean the demand for them has diminished. “Single family home rentals have become more popular than ever after COVID. Many more people want more space to work or study from home. Some are also living as nomads with the perks their new virtual jobs provide,” adds DiBugnara. This continued need for single-family homes suggests that the rent-to-own market has the potential to stay and grow. If Blackstone’s recent $6 billion double is any indication, other investment firms will soon follow.

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For the average consumer, this circumstance could mean finding other ways to acquire their dream home over the next two years. While the house you might have wanted last year could have been snapped up in less than a month, with a rent-to-own option, you might be able to find what you’re looking for more easily.

For qualified buyers, such a scenario could potentially offer more options – perhaps even an opportunity to “try the house for size” before making a solid commitment. If rents remain high or continue to rise, the difference between the rent paid for a regular home and the value-added payment in a lease-to-own agreement could be modest enough to make lease-to-own a value proposition. attractive.

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