Benefits And Disadvantages Of Lease Option Real Estate Investing

Lease option real estate investing is a creative way to get started in real estate investing. The biggest advantage of the investing approach is “control”. It basically provides the investor the right to possess– be in control of– and profit from a property without owning it.

A lease option contract is a mixture of two records. The lease part is where the owner consents to allow you to let their property while you pay them rent for a stated time. During the lease period the owner can not increase the rent, let it to anyone else, or sell the property to anyone else.

The option part represents the right you bought to buy the property later on for a special price. The option part of the contract obligates the seller to sell to you personally during the option period- but it doesn’t obligate you to buy. You’re only obligated to create rental payments as agreed during the lease interval.

When the lease option contract is written and structured correctly, it can offer enormous benefits and advantages to the investor. In the event the lease option includes the “right to sub lease” the investor can yield a positive income by renting the property to a tenant for the length of his lease, or lease option the property to a tenant-buyer for favorable income and future profits. In the event the lease option includes a “right of assignment” the investor could assign the contract to some other buyer for a quick profit.

Lease option real estate investing, is a versatile, low risk, highly leveraged method of investing that may be executed with little to no cash.

High Leverage

It is highly leveraged because you’re able to obtain control of a property and profit from it now–even though you do not possess it yet. The undeniable fact that you simply do not possess it also restricts your private responsibility and liability.

Little to no cash

The investor’s cost to implement a lease option agreement together with the owner needs little to no cash out of pocket cash because it is completely negotiable between investor and owner. There are a number of manners the option fee could be structured such as an installment plan, balloon payment or other agreeable arrangement between both parties. The option fee can even be as little as $1.00. To be able to secure the property for purchase at a later date, tenant-buyers generally pay a non-refundable option fee of approximately 2%-5% of the negotiated purchase to the seller.

Flexible

It’s a versatile approach of real estate investing because terms of the agreement like payment amounts, payment dates, installments, rate of interest, interest only payment, balloon payments, purchase price and other terms are all negotiated between seller and buyer. Responsibilities of both parties are also negotiable. For instance, in the event the investor doesn’t need to act in the capacity of a landlord, he could specify in the lease option agreement that tenant-buyer will be responsible for all minor maintenance and repairs and the first seller will remain responsible for any major repairs.

Fiscally Low Danger

It’s low risk financially. In the event the property fails to go up enough in worth to produce a profit, you have the bought the right to modify your mind and let the “option to buy” expire. Even if your tenant-buyer decides not to buy the property, you have benefited by a positive monthly income from the tenant-buyer’s rent payments and upfront non-refundable option fee.

Let’s look at an instance of a lease with option to buy structured in a sense in which the investor profits in 3 different stages of the investment.

Gain #1 non-refundable option fee

Future sales price negotiated with the present owner is $125,000 with an option fee of 2% of the sales price. The future sales price you set for your tenant-buyer is $155,000 and the option fee is 4% of the sales price. Option fee the tenant-buyer owes you is $6,200. You collect $6,200 from tenant-buyer and pay $2,500 to the owner and your profit = $3,700

Gain #2 cash flow from monthly rental payments

The Monthly rental payment you negotiated with the owner is $1,000. You set the payment at $1,250 per month for your tenant-buyer. Each month you collect $1,250 from your tenant-buyer and pay the owner $1,000 each month. Your profit is $250 monthly positive income during the lease interval.

The difference in the negotiated future purchase price together with the owner as well as the future purchase price set for your tenant-buyer. Your tenant-buyer decides to exercise their option to buy. You buy the property from the owner at $125,000 and then sell it to your tenant-buyer for $155,000. $155,000 – the $125,000 you pay to the owner = $30,000 profit.

Finding these motivated sellers and buyers should not be difficult. The continuing down turn in the real estate market has created a great number of sellers who can not sell their property and also buyers who can not get funding to buy. The seller could possibly get a fair offer to be paid later on by selling their property to a real estate investor on a lease option basis. A potential tenant-buyer could get home ownership without needing to qualify through traditional home loan guidelines.

One disadvantage of lease option real estate investing involves the tenant or tenant-buyer maybe defaulting on monthly rental payments. This would allow it to be crucial for the investor to come up with cash out of pocket to settle the owner and possibly must continue with eviction process. Yet, there are particular provisions and clauses which can be written into the lease option to discourage buyers from defaulting on payments.

In case the investor fails to do “due diligence” before entering into a lease option agreement, he could end up with a property that is unmarketable. There could possibly be numerous liens on it, dilemmas involving possession of the property or it may be in foreclosure. By diligently performing research before entering into a lease option agreement, the investor can avoid these errors.

Despite the few disadvantages, lease option real estate investing continues to be a great method to put money into real estate with little to no cash and low financial risks. Additionally, it remains to be a great strategy to obtain control of a property you do not possess and create favorable cash flow and profits on flexible terms.

The point is, the secret to success in today’s challenging real estate investing market is really to use simply the finest creative ideas, proven tools and strategies which have been successfully used by other investors to generate income and profit from today’s housing market. The further you comprehend and apply now, the further you will benefit from today’s financial catastrophe.