What is a lease option? Let's talk about how you can make money with these golden tools (it's easier than you realize)
Most of us already know what it is to lease a home or property, and adding an option to buy that property into the mix is a very simple answer to what is a lease option as it relates to real estate.
I'm going to share with you how I use a lease option to buy property, never put in any money of my own, and make a nice monthly income from each one.
The key is to find a homeowner who may be open to leasing the home they have for sale. They are not as rare as you might expect. You just need to find the motivation for putting their home up for sale -- then you can share options they didn't knew they had.
It's a bit more involved, and later on we'll discuss how this works so you can make money with real estate, often with no cash of your own in the deal. But first, it's important to appreciate the value it can add to your real estate investing business.
I know people who only work with lease options, because for their own reasons simple rental properties are not for them. And that may be your approach, too.
Homes are for sale in every city, and many of the homeowners have a need to sell fast, but they don't want to sell their home for less than the current market value. Typically, you'll find good lease option deals in nicer neighborhoods, and rarely do they need much fixing.
Some of the reasons a homeowner would consider leasing the property to you are :
By offering to lease the property now, and cash them out later while covering their payments (if any) they have the freedom to move on to wherever they plan to go. Usually I offer a sort of "down payment" amount towards the purchase of the home, which will take place months from now. Often a year or two down the road. And I will get that back and more, as soon as I find a tenant buyer.
Not every Seller is open to this, but you only need a few to make a good steady income.
Once the homeowner and I agree on terms of both the lease and the purchase, I get to work finding a tenant that will lease the property from me. I will then offer to sell the tenant an option to buy the house. Most people who rent would jump at the opportunity to become a homeowner.
Sometimes the tenant exercises that right to buy the house, and sometimes they end up walking away. Either way they agree to lease the house at a rent a bit higher than I negotiated with the Seller.
There are a few good reasons a tenant will pay more rent for this house:
The simplicity of this is that I will earn a rental spread from the new tenant, over and above what I am paying for the home to cover the Seller's monthly obligations. And with the new option to purchase the house to the new tenants months down the line, I will collect an option fee for that privilege. The tenant's option fee will be credited towards the purchase price once they decide to buy the house.
That happens more often than you'd think. There are many reasons that a tenant buyer doesn't end up buying the property. It may be that they have a job transfer, or weren't able to clean up any credit issues in time to apply for a home loan.
When that happens, we just start over with a new tenant buyer. Typically, the tenant has kept the house up really well, because they felt they were more than simple renters.