Are you interested in real estate investing but lack the necessary funds for a down payment? Are you unable to obtain a mortgage because of credit problems or a low income? If this is the case for you, the lease option strategy could be the best option for you to begin investing in real estate right away. When you are just getting started in real estate, this innovative strategy, also known as “rent to own,” can be a great way to generate income from your investments.
What is a Lease Option?
When a property owner enters into a lease agreement with a tenant, the tenant is also given an option to purchase the property, referred to as a lease option agreement. The option gives the tenant the right to purchase the property at a specified price and within a predetermined time frame agreed upon by both parties.
This “tenant-buyer” is required to pay a non-refundable fee in exchange for this option. During the term of the option, the landlord is prohibited from selling the property to anyone else.
For real estate investing purposes, there are two main ways in which investors can utilize lease options.
Selling a Lease to tenant-buyer
In this situation, you own the property and engage in a lease option agreement with a tenant-buyer to sell the property to them. You receive the option fee as well as a long-term tenant. The tenant-buyer receives the lease as well as the option to purchase the property.
This strategy is not the best choice for those looking to invest with little or no money down.
The reason for this is self-explanatory: in order to employ this approach, you must first acquire ownership of the property. However, if you own a property and have difficulty selling it, this might not be a terrible choice. You are able to secure a long-term tenant while also receiving some option money.
Buying a Lease from the owner
Basically, this is the other side of the lease option contract. You are the tenant-buyer in this situation. As a result, you pay the owner an option fee in exchange for a long-term lease. You want a lease that permits you to sublet the property to another renter if the situation arises. In addition, you want a lease with a rate that is below market value.
Since you are providing them with a very long-term lease, you should be able to persuade the owner that this is reasonable. Then you locate a tenant who is prepared to pay market rent and rent the property to them for the rest of the term. You save the difference between the rent you pay and the rent that your renter pays you.
If you don’t have a lot of cash on hand or don’t qualify for traditional bank financing, lease choices might be a great investment approach for you. They have the potential to provide you with consistent cash flow month after month if they are correctly structured.