Rent to Own: How to Buy a Flat in Dubai with a Test Drive

Dubai’s real estate market offers foreigners a number of options to buy a home, both for investment and relocation. In the city of skyscrapers, you can buy title to a flat (freehold) or a long-term lease for a flat for up to 99 years (leasehold). You can pay in instalments or with a mortgage. However, many people still do not know about one little known way of buying real estate in the UAE: rent with the option of buying the property. You can move into a house without paying the full amount upfront and without resorting to a mortgage. In addition, the buyer can cancel the transaction even after several years of living in the flat. Read on to learn more about the rent-to-own system in Dubai and the pros and cons.

• What is the Rent-to-Own System?
• Where Does the Rent-to-Own Option Exist in Dubai?
• How Can a Foreigner Buy a Property through the Rent-to-Own Option in Dubai
• Rent to Own vs Mortgage
• Benefits of the Rent-to-Own Option in Dubai
• Risks and Disadvantages of Rent-to-Own Plans in Dubai
• How Is a Rent-to-Own Contract Structured?
• What You Should Consider Before Signing the Contract
• Steps Involved in Buying a Rent-to-Own Flat in Dubai
• Additional Expenses

What is the Rent-to-Own System?

This is an option for anyone who cannot pay the full price of a property upfront or make a down payment on a mortgage or instalment plan. This option is also available for foreigners in Dubai. Title to the real estate will be transferred from the seller to the buyer in two stages: the rent period and the purchase period. 

Immediately after the signing of the contract, the  expat can move into the flat as a tenant. For several years, the property developer will charge rent and include part of this amount in the down payment for the purchase of the flat. 

Such a purchase plan does not imply that the entire cost of the flat is paid through rent. It makes it possible to gradually contribute 25% to 30% of the cost of the housing. This will take three to four years, Then the tenant has to choose from one of four options:

• pay the rest of the property price
• use an instalment plan
• use a mortgage
• cancel the purchase and pay a fine to the developer

In addition, you cannot move into the flat without making an initial payment. The tenant must make an advance payment which consists of the rent for the coming year, state duties and purchase fees (from 7 to 10% of the property price depending on whether the real estate agent was involved in the transaction).

Where Does the Rent-to-Own Option Exist in Dubai?

Several major property developers offer this option, including Emaar Properties and Damac. Developers do not apply this option to all their projects. In each specific case, you need to check with the developer’s representative whether the option is available.

While rent-to-own plans apply both to both flats and villas, this purchase option is more popular with buyers of flats.

How Can a Foreigner Buy a Property through the Rent-to-Own Option in Dubai

Expats can buy title to a property in Dubai only in freehold areas. This rule also applies to rent-to-own plans.

Rent to Own vs Mortgage

Both the mortgage and rent-to-own options are designed for anyone who is not ready to pay the full price of the property right away, but wants to move in as soon as possible. Still, there are some key differences. 

Procedure. A mortgage contract is concluded by three parties: the buyer, the seller and the bank. In this case, the buyer must undergo credit checks and pay for a valuation of the property. Banks in the UAE may require any documents and statements to verify the reliability and solvency of the applicant. If you do not provide any of the required documents, you may be rejected. It is difficult for non-UAE residents to get their mortgage application approved.

Credit record. Banks conduct a thorough check of the applicant for a mortgage, with a bad credit history leading to rejection. While property developers may also consider the credit history of a rent-to-own applicant, as a rule this does not affect the decision. The developer does not lend money to the buyer; if the tenant stops paying, the developer can simply terminate the deal. 

Down payment. The holder of a resident visa can get a mortgage by paying a down payment of at least 20%, and in the case of non-residents – 50%. The down payment for a rent-to-own property equals 7-10% of the property value. This amount includes the annual rent and additional purchase costs: agency commission, state duties and fees. 

It is OK if the tenant does not have funds even for the advance payment. This money can be borrowed. 

Chance to change your mind. The tenant can cancel the purchase at any time if they decide that the flat is no longer suitable for some reason. You cannot do this with a mortgage: you cannot cancel the transaction and stop paying the mortgage.

Benefits of the Rent-to-Own Option in Dubai

The rent-to-own option is perfect for families who do not have significant savings, but want to move into their own home as soon as possible. We present here the advantages of this option.

No need for large initial investments 

In a rent-to-own plan, you can move into a flat with a minimal initial investment. At the start, you only need to make an advance payment.

Fixed housing costs

The Dubai real estate market keeps growing: purchase and rent prices increase every year. According to various sources, in 2022 alone housing prices in Dubai increased by 20% to 80% depending on the area and housing status. Analysts do not expect a price fall in coming years. A rent-to-own contract sets a fixed price for the selected flat. The cost will not change for several years of rent.

The tenant does not pay for house maintenance 

The owner, in other words, the property developer, is responsible for the maintenance of the flat for the entire rent period. The tenant is released from this expense item, but still has to pay for utilities.

Chance to assess the advantages and disadvantages of the property

Rent to own is the only purchase plan where you have a flat test drive. Over the years of rent, a family can assess the layout of the flat, the area of the city, its community, the way to and from work, nursery or school. It goes without saying that property developers include penalties for cancelling the transaction in the contract, but the choice of whether to buy or not is still up to you.

Risks and Disadvantages of Rent-to-Own Plans in Dubai

The rent-to-own option also has disadvantages. Although this way of buying a home is more affordable than other options, it is not the best choice for everyone. Here are a few points that should be considered.

The rent and price of the property exceeds the market price

The property developer collects rent payments to form an initial payment of 25-30% of the cost of the property. Therefore, the rent will be significantly higher than the market level. To take a look at current rent prices in Dubai, click here.

The final purchase price will also turn out to be higher than the one that you would have to pay in a standard transaction

Independent assessment of your financial capabilities

When concluding a rent-to-own contract, the buyer and the property developer discuss and draw up an individual payment schedule. However, an expat has to independently assess their financial capabilities for several years ahead. The payment of three to four years of rent will be followed by the period when most of the cost of the property must be paid (with a loan or payment in instalments). You should be prepared for this and consider possible negative scenarios, such as the loss of employment or illness. If you have any difficulties with calculations, it is advisable to seek help from a financial consultant and other specialists in this area.

You have to pay a fine if you don’t proceed with the purchase

The property developer sets the amount of the penalty to be paid if the tenant refuses to buy the flat and includes this amount in the contract. If an option contract was concluded, then the seller collects the option fee in case of refusal. You should keep in mind that the contract may include a penalty for the early payment of the cost of the flat which can also cause difficulties.

How Is a Rent-to-Own Contract Structured?

Just like all other real estate transactions, rent-to-own contracts are registered with the Dubai Land Department (DLD). The agency has developed standard documents and payment plans that you can use. However, as a rule the property developer and the buyer agree on individual terms. Legally, a rent-to-own contract can be drafted in two ways. 

Purchase option contract

Such a contract contains:

• the property price
• the period when you can buy the property
• the option fee agreed on by the seller and the buyer

The buyer pays the option fee according to the schedule along with the rent and gets the right to buy the flat. If the tenant refuses to buy the property, the option fee remains with the seller as compensation. In other words, such an agreement documents officially the different options.

Sale and purchase contract

This is a simpler and more common form of contract, which indicates the price of the real estate, the rent, the final amount and the payment schedule. If the final cost has still not been defined, the contract includes the date by which the price must be finalised. If the expat decides to cancel the purchase, there will be penalties - they are also indicated in the contract.

What You Should Consider Before Signing the Contract

The rent-to-own option is a major responsibility for the buyer who has to critically evaluate their financial capabilities. The best option is to hire an experienced lawyer who can review the documents and advice on complex issues. As the contract is drawn up individually, you should go through some of its points very carefully:

• the price of the property
• the lease period
• the terms and conditions for cancelling a purchase and the percentage of the return of the down payment
• the percentage of the rent offset against the down payment
• the payment schedule and the sizes of all the payments under the transaction
• the terms and conditions for the early buyout of the property
• the penalty for the late payment of rent
• guarantees that the property developer will not terminate the contract
• the consequences if the tenant loses their job or is denied a loan after the end of the tenancy period.

If you plan to take out a loan after the end of the tenancy period, make sure in advance that the bank will offer you this option. You can read more about mortgage terms and conditions in Dubai here.

Steps Involved in Buying a Rent-to-Own Flat in Dubai

Under a rent-to-own plan the buyer obtains the title deed after paying the entire amount. As a result, the procedure can take a long time. Consequently, the registration of the transaction proceeds in a similar way to the purchase of an off-plan property: through the Oqood contract portal which issues a temporary document.

For registration you will need:

• a copy of the sales and purchase contract
• Your Emirates ID or a copy of your travel passport if you are a non-resident.

Property developers have access to the Oqood system. They fill out the application, and the tenant receives the certificate by email. After you have paid the entire amount and the transaction is completed, the certificate is replaced with a title deed

Additional Expenses

When you are buying a home in Dubai under a rent-to-own plan, you will need to pay duties and fees for both the purchase and rental of a property. We present here the fees in Dubai for the purchase of housing:

• the transfer fee to the  Dubai Land Department: 4% of the property price divided in half between the seller and the buyer
• the administration fee: AED 580 dirhams, or approximately USD 160
• title deed fee: AED 250 (USD 68)
• knowledge and innovation fees: AED 10 (USD 3) each
• the registration fee: from AED  2,000 to AED 4,000 (USD 545 to USD 1,100) depending on the price of the property.

If you rent a property, you must pay 0.25% of the rent to the state. If you plan to use the services of a real estate agent in Dubai, then you will have to pay about 2% of the price of the property. While this is not cheap, we would advise you not to try to save money here.

In a Nutshell

While renting a flat in Dubai with the option of buying it out later is not the easiest way to buy a home, it is the only option which allows you to become the owner of your dream property in the UAE without making a down payment. If you choose this option to buy a flat, you need to conclude a special agreement with the developer. Under its terms, you can move into the flat immediately and live there for several years as a tenant. Rent payments will be partly included in the down payment for the purchase. When a sufficient amount has been collected, the tenant can buy the flat with a loan or an instalment plan.

Cover photo: Martinschuschi (Pixabay)