Rent to buy leasing options in Portugal… are they worth it?

Doubting about whether to buy or rent is very common. On one hand, buying a home in Portugal requires a great economic effort, but on the other hand, spending your entire life paying the rent on a house that will never be yours may not be the best option. So how do you decide? Is it better to buy or rent in Portugal?

In this article, prepared for idealista/news by the website ComparaJá.pt, we analyse another solution: a leasing option, also known as 'let to buy', ‘rent to buy’ or ‘rent-to-own’. Find out everything you need to know about this alternative when thinking about property acquisition in Portugal.

What is rent-to-own and how does it work in Portugal?

Simply put, a leasing option is a way of buying a home that takes into consideration its future acquisition when you rent it previously for a certain period of time. With let to buy, you rent the house as normal (normally a period of 2 to 5 years in Portugal, as stipulated in the contract) and then you have the option to buy it.

What are the advantages of it?

It allows a great deal of flexibility as you can live in your home before you buy it, giving you more time to save money. For those who don’t have the economic conditions to buy a Portuguese property but wish to do so, this is an excellent alternative to consider.

Another advantage is the fact that the tenants are not obliged to buy the house at the end of the rental period. The only commitment is on the part of the seller, who must sell their house to the tenant within the agreed term if the tenant still wants.

If, after a few years of renting, you decide that it’s not a good deal, it isn’t mandatory to buy - you can try before you buy! In the same way, if you decide that you want to bring the purchase forward before the end of the rental period, it may be completed as long as both parties agree.

There are also advantages for the homeowner: they can increase the likelihood of selling the home and, even if they don't end up selling it, they will still have a return on the rental.

All procedures, such as term lengths or values of the property, are established freely between the tenant and the owner, signing an agreement indicating the leasing option. Normally, the term of the lease is determined between two and five years, and the acquisition may be brought forward before the end of this period. Everything else in the rent-to-own contract is the same as in a normal leasing contract, so even the community costs for the building are paid by the landlord, not the tenant.

Finally, there is one more incredible benefit that’s worth pointing out: the value of the rent that is paid is discounted from the total value of the sale, if so determined in the contract. In this way, tenants are not losing their money on rent; rather, they are investing it in the possible future purchase. Furthermore, the final sales price is often heavily discounted from the standard Portuguese market rate anyway as a way to incentivise potential tenants/buyers.

Are there any disadvantages?

There are, of course, some disadvantages. There is little demand for this option in the Portuguese real estate market because the rental market has been growing in recent years, while sales have taken a backseat.

However, if you do manage to contract a rent-to-own agreement, remember that the amount of rent may be subject to periodic revision, just as with any let. There could possibly even be an extra 'option fee' to pay on top of the deposit so the owner has an additional guarantee to know that the tenant is serious about purchasing the home.

Also, you should be careful about the final sale price agreed at the beginning of the rent-to-own period. Whilst it's true that the price may be lower than the market average at the time you sign the lease, it may be higher than the market average within five years' time when you come to buy, depending on inflation and the evolution of the housing market and prices.

For the seller, too, there is a risk that he or she will want to sell the property but that the tenant will eventually choose not to keep it. However, homeowners only usually agree to leasing options when they want to sell the home but aren’t in any hurry to do so and use the rental as a transition period until the sale.

Weigh up the pros and cons of a let to buy leasing option to see whether it is worth it for you because it may just be the perfect option for you to afford to purchase a villa or a house in Portugal within the next 5 years, with the extra possibility to try before you buy.