Eric writes:
Hi Greg!
I am writing because I really enjoy your blog. I’m licensed, but haven’t worked with realty in years due to being back in IT (which you also seem to have a passion for), so I enjoy hearing from the experts. I’m in a rent vs buy bind right now. I have someone that can help with a rent-to-own (agreement for sale I believe?) situation, but the main reasons I have for buying a house is that I can take deductions for home office and mortgage interest.
Owning is several hundred more, but temping. However, if during this rent-to-own deal, I’m not able to take those deductions.. I think I’d prefer to save the money, rent something equally as nice, and watch the market, rates, and my credit very carefully.
Are you familiar with this? I see plenty of rent-to-own/lease option etc. wording on craigslist rentals, but do you know if the tax man allows you to take deductions on places you are “renting to own”?
Appreciate any feedback, have a GREAT week 🙂
Eric
Hi Eric, Russell here. The Ask the Broker questions get passed on all of us – so I’ll toss my hat into the ring on this one.
It is my understanding – and also logical, if you think about it – that you can only deduct the interest if you are actually paying the interest. With a rent to own agreement you aren’t liable for the interest, aren’t actually paying it and therefore can not deduct it. So, based on your question, you would be better off renting. But that isn’t the only reason you would be better off renting. There is probably some exception to just about any financial “rule” one can write and I’m sure there are some who will disagree with what I’m about to say here – but I’ll go ahead and say it anyway.
Combining a lease with a purchase agreement is, for most people, the worst of all possible worlds. If you are the tenant/buyer you usually wind up paying more in rent than you ever would if you “just rented”. As most agreements of that type do not wind up ever actually closing the tenant/buyer paid more in rent than they needed to for a comparable house. Also, there is the issue of the price of the home: for a valid agreement you would need either a future purchase price to be set now or a formula for setting it later. What seller/landlord is going to (in a rising market) let you buy later at today’s price? And in a flat or declining market why would you ever want to agree on a future purchase price now?
There are some advantages if one is the seller/landlord: the buyer/tenant won’t usually quibble about the future price today and is willing to pay more each month as they are “renting to own”.
You are better off to rent until your credit and finances allow you to buy – then you can really enjoy “going shopping” as you will have the luxury of getting to pick any house in any area that is within your budget – as opposed to settling for whatever happens to be currently available on a “rent to own” basis.
Greg Swann says:
I agree with Russell about lease/option or lease/purchase arrangements. I’ve always regarded them as a sucker bet. I won’t do them with clients, and I don’t work with investors who want to do them.
There’s one thing that Eric said that popped out at me: “(agreement for sale I believe?)”
If the rent-to-own arrangement is a land contract — a note carried back by the seller on a contract for deed — then all of the homeowner deductions would apply to Eric. That’s the good news.
The bad news is that a land contract is also a sucker bet in Arizona, because it makes foreclosure entirely too easy for the seller. As with lease/purchase agreements, sleazy investors like land contracts because they can take the property back again and again, keeping the down payment every time.
As Russell says, hang in there until you can qualify with a mortgage broker to purchase a home by deed of trust. The selection will be much better, the prices lower and your investment much more secure.
January 16, 2007 — 10:42 pm
Jeff Brown says:
Hey Greg – Are the prices in Phoenix gonna be lower in 2-3 years? 🙂
January 16, 2007 — 11:38 pm
Greg Swann says:
> Hey Greg – Are the prices in Phoenix gonna be lower in 2-3 years?
I wasn’t clear: Lease/option, lease/purchase and land contract deals are routinely overpriced, because they’re niche-marketed to people who think they have nowhere else to turn.
January 17, 2007 — 5:58 am
Drew Nichols says:
I bet Greg wishes he knew the Phoenix Real Estate prices in two years!
I think renting is a no brainer for the OP. Also coming from an IT background, I know that jobs in that business are never steady so on a more pratical level I’d be building up a war chest myself.
January 17, 2007 — 7:12 am
Curtis Lawson says:
I do these routinely with a client who owns a lot of rentals. I see it as advantageous to the tenant/buyer. They rent the house for market rate, negotiate & lock in the sales price at *todays* prices, and get to close on it at any point during or at the end of the lease. We also credit them back 1/3rd of total rents paid to go toward closing costs or the sales price. They can also choose not to buy the home, in which case they haven’t lost anything.
I guess what I’m saying is: it depends on how the contract/lease is written.
January 17, 2007 — 6:39 pm