There are literally dozens of ways to purchase a property with little or no money down. These tend to work well with real estate investors that are just starting out or the experienced investor that is reaching the limits of their available cash and/or credit. For these investors, a lease option (also known as rent to own or something similar) can be a great creative financing option. We aren’t going to go into the specifics of how to do a lease option in this article, but instead, are going to dwell on the advantages of a lease option. Once you have convinced yourself that this is a great way to go, you can load it into your arsenal of real estate investment strategies to help you on your road to success. They key is being educated and having someone to guide you along.
For those of you that are totally new to this concept, a lease option is merely a contract between a buyer and seller. The buyer then has the option to purchase that property at an agreed upon price at a specified time. (There may be other terms and conditions involved) Many investors act as a master tenant or middleman. The master tenant leases a seller’s property from a motivated seller and agrees upon a selling price when they exercise their option. The investor then finds an end buyer/tenant. This end buyer will normally rent the property for a specific period of time (12-24 months or more) and then choose at the end of the option period to move away or purchase the property at a pre-agreed upon price. Obviously, this price is higher than the agreement between the seller and investor.
Here are the first 5 of 10 great reasons that a lease option can work well for a real estate investor- we will cover the next 5 in Part Two of this article:
1. Little Outlay of Cash. With lease options, you are normally dealing with decent looking properties that require minimal fixup. The sellers are normally pretty motivated. (Relocation, divorce, illness, late on payments, etc.) In most cases, the sellers don’t require a ton of cash up front. The cash they do get, if any, can come from your end buyer’s option fee.
2. Doesn’t Go on Your Credit Report. Because this is a private transaction, you don’t need banks and it won’t go onto your credit report.
3. You Can Usually Pay More for the Property. On lease option properties you normally have as an end buyer, someone that has income but can’t yet qualify for a standard loan. Because you have several profit centers on a lease option (see item #10) you can afford to pay a bit more ordinarily. Please note that you still have to do your numbers to make sure that they work.
4. You Can Normally Sell at a Higher Price. Once again, this goes back to the type of buyer motivation. The buyer isn’t as interested in “How much?” but is more pointed to “How much down and how much per month?” Please note that your goal is to get the end buyer to eventually qualify for a standard loan, buy the home, and then cash you out. With a standard FHA or conventional loan, the house will have to appraise for that eventual selling price.
5. You Can Normally Command Market Rents. Because you have a motivated buyer, you can normally get market rents. Some investors propose that you can charge a lot more, but we haven’t found that to be the case. That being said, you can normally charge at the high average end of the spectrum, within reason.
Well, that is the 1st 5 Reasons that Lease Options make sense for a real estate investor. If you are new to this strategy, you might consider having a trusted mentor guide you through the first few deals to make sure your paperwork, etc. is correct.
Stay tuned for Part 2 of this article!
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