Ksh7M Dream Home: Comparison of Buying at Once vs Renting to Own

In the journey toward homeownership, there are two distinct paths you can take: paying for your dream home outright or opting for a rent-to-own arrangement. For some, the idea of an outright purchase, with no debt and immediate ownership, is the ultimate goal.

However, there are scenarios where a rent-to-own plan, despite seeming less conventional, can be the more financially savvy choice, even if you have the cash on hand.

Let's break down these two options and explore the financial implications of each, using the example of a Ksh7 million apartment in Ruaka, one of the leading Nairobi satelitte towns.

Option A: The One-Time Outright Purchase

An outright purchase is the most direct and fastest way to become a homeowner. You pay the full price upfront, and the property's title is transferred to your name almost immediately.

For the Ruaka apartment, this will set you back Ksh7 million. 

Advantages

1. You will have immediate ownership, and you all do not have to worry about losing the house because of defaults.
2. Paying upfront gives you a significant advantage in negotiations, often allowing you to secure a better price or discount from the seller.
3. Since you're not taking out a loan, you avoid paying thousands or even millions in interest that would accumulate over a mortgage term.

Disadvantages

1. This option ties up a large sum of your capital in a single, illiquid asset. It may leave you with little or no cash for emergencies, other investments, or opportunities that could generate passive income.
2. Besides the purchase price, you must also pay for legal fees, stamp duty, and other closing costs all at once, which can amount to a substantial sum.

Option B: The Rent-to-Own Path

The rent-to-own model offers a more flexible route to homeownership. It's a two-part agreement where you first lease the property with the intention of buying it at the end of the lease term. A portion of your rent goes towards the final purchase price.

For a rent-to-own property with a total value of Ksh 7,000,000, you pay a deposit of 60%, which is Ksh4.2 Million. You then pay a monthly rent of Ksh23,000 for 12 years.
The total amount paid in monthly rent over 12 years (144 months) is: Ksh23,000 x 144 = Ksh3,312,000.
The total cost of the rent-to-own option is: Ksh4,200,000 (deposit) + Ksh3,312,000 (rent) = Ksh7,512,000.
This calculation shows a difference of Ksh512,000 between the outright purchase and the rent-to-own option.

Advantages

1. Rent-to-own is ideal if you do not have the capital as a whole, and gives you time to make payments over a set period of time.
2. You also get to 'test drive' the property and neighborhood before committing to the full purchase.
3. The initial deposit is less than the full purchase price, allowing you to retain liquidity for other investments or emergencies.
4. The purchase price is often locked in at the beginning of the agreement, protecting you from future market price increases.

Disadvantages

1. The rent-to-own option often results in a higher total payment than an outright purchase due to the accumulation of rent payments.
2. If you fail to meet the terms of the agreement or decide not to buy the house at the end of the lease, you will forfeit all the money you've already paid towards the down payment.
3. Until the final purchase is made and the title is transferred, you are legally a tenant, not an owner. This means you have fewer rights and protections.

Which Option Is Best ?

There is no one-size-fits-all answer. The outright purchase is a powerful move for those with significant cash reserves and a desire for immediate, debt-free ownership. It's for the buyer who wants speed, control, and doesn't mind tying up a large amount of their capital.

On the other hand, the rent-to-own path is for the financially cautious and the long-term planner. It's an excellent way to transition into homeownership without the pressure of a massive upfront payment or the rigid requirements of a traditional mortgage.

The best choice depends on your financial position, your risk tolerance, and your long-term goals.