Selling a property “Rent To Buy” may be one of the best ways to make the most money as a real estate investor out there… and it will create long term wealth that will pay off in cold cash in a very short time.
Rent VS. Lease Option
Being able to lease option and rent your properties is going to prove to be a PRICELESS skill for you.
Since you are not putting any money down or getting a new loan for any of these deals, you will be able create a beautiful CASH COW with NO RISK.
By lease optioning your properties you are securing both a down payment and, usually, residual income.
There are advantages and disadvantages to renting the properties you own and doing lease options.
The typical person who buys a property with a Lease Option, does so because they can not figure out how to purchase any other way. This means that they probably have credit issues, time on the job issues, income issues or no down payment.
A typical renter, on the other hand, can be found with good credit and a stable job.
The quality of tenant that you get is the only real advantage that I see with renters. Lease Options have some other real benefits.
First of all, you can get a higher monthly lease payments with a lease option than you can with a standard renter. (typically 10% more than market).
Instead of getting a refundable deposit (like you would get from a renter), you get non-refundable option money. I suggest charging a minimum of what you would charge for the deposit… typically, 1 month’s rent.
Check out what is customary in your area. Some areas are getting as much as 5% down on a lease option!
Since it is likely that the tenant will never exercise their option (only 50% on average will), being able to keep the option fee will more than cover most of the costs of getting the property re-rented or leased after the current tenant moves out.
You can also sell the home for more than market value… typically 5%-10% more. If the person who options it does buy, it will be a good deal for you. If they don’t buy, you just go out and find another tenant.
Another nice thing about Lease Options is that you can usually get a longer lease. If the option has a 3 year term, you can get a lease for the same period. Renters, on the other hand, will usually only give you a one year lease.
The longer the lease the better. I suggest that you get at least 1% lease option fee for every year of the option. If they want to extend the option, just charge them additional option money (which they can apply to their down payment)
If a tenant wants to move out before their lease is up, they still owe you the balance of the lease. This protects you and puts you into a strong negotiating position. Any concession you make for them is your decision.
If someone wants to move out before their lease is up, here is what I suggest.
Make them continue to pay their rent until the new tenant moves in. They can either make it available to show before they move out or wait for you to rent it after they move out. Either way, you won’t lose money, plus you get to keep the lease option money.
If you are in this situation with a tenant (not folks who are lease optioning), treat them the same way and give them their deposit back if they leave the home clean.
Treat people fairly… just like the golden rule says and it will benefit you in the long run.
One last benefit of Lease Options is that when a tenant believes they are buying a home (rather than renting) they will treat it better. A homeowner is more likely to fix up a property and tries to protect their investment.
Coming Up in my next article… “Get Top Dollar For Your Properties By Financing Them For New Buyers!”
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Chuck Morse is a seasoned investor.
He owns several properties and actually helps people buy and sell homes everyday, so he understands how traditional real estate deals are structured.
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