Islamic finance based rent to own real estate financing and its effect on demand, sales and the growth of real estate development

Abstract

The objective of this study is to explore how rent-to own mode of financing can promote and increase the demand, sales, and the growth of the real estate sector. The study is purely a theoretical analysis where mathematical and financial models have been developed for establishing rent-to-own mode of financing as a valid and systematic tool for real estate development. Rent-to-own mode of financing is both debt free and interest free, and both buyers and sellers can calculate different options for monthly payments, duration, and other parameters. In addition, multiple regression model has also been developed and partial derivatives are applied for evaluating individual effects of each of the explanatory variables on the dependent variable. The study finds that interest embedded inflated price for rent-to-own mode of financing will not help rather hurt and will negatively affect the demand, sales, and the growth of the real estate sector. The smaller installments, longer payback periods, buy back guarantee, free registration and free quality furnishing positively contribute to the demand, sales, and the growth of the real estate sector. In addition, the financial model developed in this study will make it easier for truly evaluating the benefits and applying the rent-to-own mode of financing. Both formula and the tabular series developed in this study clearly explain the rent to own mode of financing and both the buyers and the sellers of the real estate will find it easy and user friendly to apply this method in the days to come. This study is one of the latest and innovative attempts for interest free and debt free tool of financing real estate and it can be generalized and applied for financing any assets in any sector of the economy. This study will be immensely useful to real estate buyers, sellers, real estate developers, governments, policy makers, research scholars, real estate regulators, and academicians across the world.