How rental purchases work. All the important facts at a glance

What is a rental purchase?

In a rental purchase, a property is first rented and then acquired at a later date. The special feature of this model is that the rent is also a down payment for the purchase. This means that the sum of the rental payments made is offset against the purchase price at the time of transfer.

The purchase price and the date of purchase are recorded in the rental purchase agreement at the start. Any outstanding balance at the time of purchase must be settled upon acquisition. The details can be freely agreed upon between the tenant and the landlord in the rental purchase agreement.

There are two forms of rental purchase – the classic form and the purchase option.

Classic rental purchase

In this case, the rental purchase agreement states that the tenant will definitely buy the property. Upon conclusion of the agreement, a down payment of approximately 20% of the purchase price is usually due. If this cannot be paid, the rent will be accordingly higher.

Purchase option

In the case of the purchase option, the buyer is free to acquire the property or not. This is also recorded in the land records. This allows them to "test drive" the property. The rent price is mostly well above the market price. This is to create an incentive to buy the property. If the right to purchase is ultimately not exercised, the rental payments made will not be refunded. However, no down payment is made at the beginning of the lease.

The following should be taken into account for a rental purchase

Affordability

The monthly rent is always above the market level, because it also represents a down payment for the purchase of the property. People without a regular income really need to check the affordability of the rental purchase, both with regard to the one-time payment upon conclusion of the agreement and with regard to the monthly financial burden of rent. This is because if the tenant defaults on payment, as a rule, the landlord may terminate the rental purchase agreement – without reimbursing the payments made.

Termination

In general, rental purchase agreements cannot be terminated. This means that all potential scenarios, such as relocation or loss of employment, should be discussed with the seller and taken into account in the rental purchase agreement.

Offering

Rental purchases are currently not that common in Switzerland. Accordingly, the offering is small. This model is often used to offer difficult-to-sell properties in order to expand the potential buyer base. For this reason, the planned rental purchase should be examined on a case-by-case basis and a specialist should be consulted – for example, for a property valuation.

Financing

If a tenant does not pay off the agreed purchase price of the property completely during the rental period, the remaining amount becomes due in a final installment. In such cases, it makes sense to contact your bank advisor. This way, an individual financing solution can be found. However, there are no government measures to promote rental purchases such as those for building your own home for example.

For whom is a rental purchase worthwhile?

From a strictly financial perspective, a mortgage is usually cheaper. However, in this case, banks require at least 20% in equity, which most people cannot afford without first saving up. As a result, a rental purchase is interesting for those who do not want to spend years saving for a mortgage or who are not suitable for a mortgage. These include, for example, senior citizens or self-employed persons without regular income.

It's best to have a legal expert look at whether a rental purchase is actually worthwhile. These are the advantages and disadvantages of a rental purchase.

Advantages

• It requires less equity than a mortgage.
• You don't have to spend years saving for a mortgage first.
• The monthly expenses and the purchase price are fixed, which provides planning certainty.

Disadvantages

• A rental purchase is usually more expensive than a mortgage.
• The market for rental purchases is small, since it is a much less common model.
• The properties that are available are often flawed.
• The rental agreement must cover various special circumstances and requires legal assistance.
• In case of structural changes, the rental purchaser has no say since they are not legally the owner of the property.

Rental purchases from the seller's point of view

Rental purchases are only of interest to those sellers who are not immediately dependent on the proceeds from the sale. This usually includes owners of several properties, developers, and project developers.

A rental purchase can expand the potential buyer base so that it’s possible to find a buyer even for difficult-to-sell properties. Furthermore, a longer holding period can reduce the property tax. If there is still a mortgage on the property, a rental purchase is a way to avoid the early repayment penalty. Finally, from the seller's point of view, the rental purchase is interesting because the immediate rental income is above the market level.

Why you should not use a template for the rental purchase agreement

Since there are a great many situations that need to be taken into account when making a rental purchase, it is advisable not to use model contracts. Instead, it is worth going through a notary. The latter then draws up the rental purchase agreement and carries out the administrative work. These points should be taken into account in particular.

Costs

• What are the monthly expenses?
• Are the rent and the final selling price fixed, or can they be increased?
• Is it possible to pay off the credit earlier if necessary?
• What happens if the tenant is in default because they have become unemployed, for example?

Right of withdrawal

• Is the property secured if the seller goes bankrupt?
• Can the rental purchase agreement be terminated in the event of a job-related move?
• Can the down payment be reimbursed under certain circumstances?

Rights and obligations

• Has the tenant's right to buy been recorded in the land records?
• Who pays for the maintenance costs during the rental period?
• Can the right to buy the property be inherited or assigned to third parties?

What are the alternatives to a rental purchase?

The traditional way to buy real estate is to take out a mortgage. An interesting special form of mortgage is the sweat equity mortgage. It requires less equity. In return, the new owner undertakes to contribute to the building of the house.

Up to 15% of the construction costs can be financed in this way. In order to make this financing form worthwhile, you need to carefully consider the construction costs and your own possibilities. Because if delays occur, the costs also increase.