Lots Of Cash But Bad Credit
When home buyers have bad credit but do have enough money for a down payment, they are perfect candidates for a lease option. They cant qualify for a new loan at the moment, but as long as the option term is two to three years, they have the time they need to clean up their credit and qualify for long-term financing.
So a lease option helps these home buyers by giving them an avenue into the real estate market and provides you with cash up front from the option consideration, monthly cash flow from the rental income, and a large chunk of cash when your lease option tenant exercises the option to buy.
If the buyer cannot exercise the option to buy in the specified time, you still keep the option consideration and monthly payments, and find another lease-option tenant.
This makes lease options a great way to make money while helping people. You earn income from your occupied property while helping others achieve their dream of home ownership. Truly win-win.
How Does An Investor Get Paid On A Wholesale Lease Option Deal
The matchmaking wholesaler of a lease option can make money through several different ways:
If the owner/seller is also an investor, s/he can make money through the monthly rental income, the option fee, and the downpayment money paid monthly by the tenant/buyer.
Look For Seller Financing
Another way to acquire property with no money down is with help from the seller.
Known as owner financing” or seller financing, this type of loan is an agreement where the seller handles the mortgage process instead of a financial institution.
The borrower repays the loan as specified in its repayment terms that are detailed in the formal agreement.
This works especially well with sellers who have no mortgage.
For example, this can happen when someone inherits a property and does not want to keep it.
For sellers that are willing to take on the role of financier, owner financing can help sellers move a home faster with sizable returns on their investment.
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Leverage Home Equity With A Heloc Or Cash
Using a home equity line of credit or cash-out refinance to buy property is another financing option for existing homeowners.
If you own a home, you may be able to use your homes equity for a down payment on your next place.
One way to do that is by borrowing cash secured against your home equity. Homeowners may be able to obtain a standard home equity loan, or a HELOC, to fund a down payment.
Using a HELOC, you secure a line of credit against your home, and then draw on it whenever you need cash flow. And you can begin paying the loan back with rental income.
How To Use A Lease Option To Invest In Real Estate
There are several ways in which you can use a lease option to creatively invest in real estate.You could offer a straight lease option. In this scenario, you will become the owner or lessor of a property. Youll find a tenant-buyer, enter the lease option agreement with them, then either sell the property eventually or cycle through more tenant-buyers until you find one who eventually makes the sale. You can also be a lessee, in which case you will still act as the investor. In this scenario, youll sign the lease option agreement with the property owner intending to sublet the property to another person.
The property owner, meanwhile, charges you the lowest rent possible. You and the property owner can split the difference in cash you get from your subletting tenant. More advanced investors can potentially try a lease option sandwich strategy, in which the investor acts as a lessee and finds the property where they can secure a lease option from an owner. Then the investor finds an excellent tenant looking for a rent-to-own arrangement. The investor signs the potential tenant with a lease option for the same property, keeping the difference in cash.
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Real Estate Investing: Lease Options Offer Multiple Profit Opportunities
Mention real estate investing strategies and the first thing that typically comes to mind is buying and selling. But a strategy often overlooked and underutilized is the optionand the smart use of options can generate some fast and impressive profits.
An option gives the buyer the right but not the obligation to buybut the seller is obligated to sell. Combine the option with a lease, and you have an excellent tool to use when you have a motivated seller with little or no equity in the property, or one who doesnt have time to wait for the traditional sales process to run its course. Instead of buying, you lease the property with an option to buy. That gives you control of the property and lets it generate cash for youbut you dont have to own it.
The rate of residential foreclosures in on the rise in many parts of the country. A pending foreclosure for any reason is just one of many situations where lease option strategies can be used. Other situations include sellers seeking debt relief or facing personal situations such as divorce.
Lease options are a great way to get started investing in real estate through lease option, especially if you have little or no cash, says Michael Van Horn, an advanced trainer with Wealth Intelligence Academy. Options let you control property without having to buy it, and you can profit at every step of the process.
Jordan Taylor is the editor of Millionaire Mentor Newsletter, which is published by Whitney Education Group, Inc.
Example Of A Lease Option
Suppose that theres a landlord with a home valued at $400,000. It already has a tenant looking to buy a home in the future. Since both parties find the current real estate market grim, the landlord offers the tenant a lease option.
In this case, the buyer-tenant pays an extra 3% of the total house price as a fee for the lease option. They also pay a premium on their monthly rent. They then have the option to buy the house they currently live in two years in the future at current market prices. The premium credit rent goes toward the eventual down payment.
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What Is A Lease
According to Wikipedia, in a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. The lease-option best serves that 80% of individuals that cannot qualify for a traditional mortgage loan. The main two reasons why they are unable to qualify for a loan are due to low credit score or not receiving a w2 paycheck. Jimmy and Bob stated that most of their lease-option tenants have more than enough monthly income to qualify for a loan, but they are just lacking in the credit or paperwork department. These are individuals that have the ownership mentality they want to be a homeowner and by giving them the lease-option, Jimmy and Bob are providing them with an avenue to do so.
How Much Money Can You Make
Real Estate Lease options help you accumulate a retirement nest egg in two ways. First, when a tenant-buyer doesnt get financing and decides to move, these become essentially rental properties from a practical standpoint. Second, when a tenant-buyer gets financed, you have a Cash Now event. You should be able to make 10% to 20% profit when the tenant-buyer obtains their financing. Properties in the $50,000 to $100,000 range should need you $10,000 to $20,000 in profit.
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What Happens If A Tenant Doesnt Execute The Option
Typically, if a tenant no longer wants to purchase the property at the end of the lease terms, s/he will forfeit the initial option fee as well as any extra amount they were paying monthly towards the future downpayment.
This can mean that the tenant potentially forfeits thousands of dollars to the owner/seller, depending on the length of the lease agreement and the initial terms outlined.
Its important to note that the option fee is not the same as an earnest money deposit. There are many rules and nuances between these different fees, but the foundational difference is that an option fee will typically not be refundable at all, while an earnest deposit can be refundable to a buyer in specific circumstances.
The property owner/seller will get to keep this option fee and any downpayment money already paid. This makes the deal a relatively low risk for the owner/seller. The risk of losing this option fee completely is a consideration that the tenant must weigh before entering the agreement.
Want to learn more about making your offers stand out? Learn about optimizing earnest deposits.
Options And Leases Defined
An option is a contract that gives the buyer the right to buy a property for a specific period of time for a specified price. The seller gets some sort of consideration, often money, as a compensation for giving up this right.
A lease is also a contract that gives one person the right to use the property of another person for a specified amount of rent for a specific period of time.
Options and leases both control your risk because they limit your promises to very specific amounts of money and very specific time frames.
With an option you control the price but you are not obligated to buy the property. You have the right to buy, but you also have the right to walk away and lose your original consideration.
With a lease that has the right to sublease to another sub-tenant, you can also control the income of the property, but you are not obligated to continue beyond the expiration date of the lease. This time frame could be as short as a few months or as long as 99 years.
In case youre wondering, these tools arent just something obscure used by real estate nerds like me and Dyches Boddiford. Entire skyscrapers in New York City are funded and built using nothing more than a long-term lease! Hong Kong was leased to Britain from China for 99 years! These tools have a long, profitable history.
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Case Studies & Examples
The companys rent-to-own options include HomeStart, which allows renters to move in after providing only a security deposit with an option to buy. Its Savings Match plan lets renters build toward a down payment, with Pathway Homes providing a fixed return and matching contribution over time. A third option to be available in the second quarter this year, Equity Builder, allows customers to buy half of their home with a 5% down payment while renting the remaining half.
Withco, a real estate start-up founded by 31-year-old Kevin Song in 2019, helps small business owners own their stores via a lease-to-own method. Withcho actually purchases the properties that business owners are renting from other landlords and often developers, then places them on a equity-building, lease-to-own plan. This often allows the next generation of small mom and pop shops to take over.
Lease Option Variables To Consider
Be sure to consider renters insurance and homeowners insurance. Renters insurance should be held by the renter and protects any loss of value for personal belongings and furnishings. The homeowner should have their own separate insurance policy to protect the home value in case anything adverse happens during the lease term, such as a fire or water damage.
Also make sure to include an appraisal contingency in your lease option agreement. The appraisal is used to calculate the exact amount owed to the property owner at the end of the lease term before the sale goes through. By enforcing an appraisal, an updated home value and price will be established, just in case the home value increased or decreased during the time of the lease.
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Purchase Money Mortgage/seller Financing
The first proven way to invest in real estate with no money is through seller financing. When buyers are unable to secure a loan from financial institutions, they may opt to seek real estate financing from the sellers. With conventional real estate transactions, the buyers will provide the sellers with the cash, to gain ownership of the property. However, with a purchase money mortgage, the seller extends finances to the buyer. The buyers will then repay the sellers, for the agreed terms.
Do I Need A Home Inspection
As with any home purchase, its critical to get a professional home inspection to ensure youre making a sound investment. It will cost a few hundred dollars upfront, but its worth it to ensure a property doesnt have major red flags. If the inspection report uncovers costly problems, youll want to work out when those repairs will take place and whos going to pay for them.
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Lack Credit Or Funding Partner Up With A Co
Maybe you dont have enough money for a down payment or closing costs, but you want to start investing in rental properties. Whats more, youre willing to do the research itll take to buy and manage these investments responsibly.
Your friend, on the other hand, has money for a down payment. But they dont have time to learn the ropes of buying rental properties.
This scenario could be a win-win for both you and your friend.
You can go in on the investment together by acting as co-borrowers.
You share responsibility for monthly payments on the house, and you can also share profits that come from rent payments or equity buildup.
A co-borrower doesnt have to be a friend, either. It could be a family member, or even a stranger that would purely act as a business partner.
What Is Creative Real Estate Investing
Introducing creative real estate investing, that is, buying and selling real estate in the non-traditional measures. There are multiple creative real estate strategies or methods, e.g. wholesaling, lease option, short sale, seller finance, tax liens, etc. In creative real estate investing, many do not need to apply for or seek out a bank loan or lending service. In short, it is all about controlling real estate and some strategies dont require owning property.
However, unlike the traditional method. In many situations, creative real estate investing allows the investor to invest with very little, if not, no money down.
These strategies can open an investors mind wide open and bring back entrepreneurship to anyone who is afraid to get started.
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Your Need For Legal And Tax Advice
While the information contained in this material was prepared with best efforts and in good faith, the publisher and author make no representations or warranties with respect to the accuracy or completeness of the contents herein.
The publisher and author specifically disclaim any implied warranties of merchantability or fitness for any particular purpose. This material and all associated documents and examples should not be used as a substitute for your legal advice on matters related to business, taxation, estate planning, or other business and financial-management matters.
A Straight Lease Option
The most common way real estate investors use a lease option is by being the lessor, or owner, of the property. The investor finds a tenant-buyer and signs an agreement with them, giving them the right to buy the property in a specified time period for a defined price. Then, the investor either sells the property to that tenant-buyer or cycles through different tenant/buyers until one of them ultimately purchases the home.
Because the majority of lessees dont end up buying the home, the owner may end up renting to two, three, four, or even more different tenant/buyers before someone obtains a mortgage and buys the property. However, if you do some great screening ahead of time, hopefully, the first tenant you place will end up purchasing the property.
If more than one tenant/buyer is needed before the home actually sells, the benefit for the lessor, of course, is that each new tenant brings the opportunity to adjust the price to the houses current value as well as an additional option fee from the new tenant. Although a lease option in this regard doesnt help you purchase the property creatively, this strategy can help you monetize by providing an exit strategy. The lease option is definitely a powerful tool to pair with other methods.
Lets look at an example of how a straight lease option might look in the real world to an investor:
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