Real Estate Beginners Can Profit From Lease Options Strategies

Whenever I’ve spoken at various investor and business workshops around the country, one of the most common questions from real estate investors during a seminar break is “What’s the best way for a beginner to get started without too much risk?” For many investors, the use of a Lease Option Strategy makes good sense. Here’s why.

HOW IT WORKS

For beginners with little or no cash, this could be a very good strategy indeed. The Lease Option Strategy has two components. Under the law, an option is a way for a real estate investor or buyer to enjoy the right -- but not necessarily the obligation -- to buy a specific parcel of real estate in a given market. The option component allows you as an investor to control investment real estate and to position yourself for later profit without necessarily having an obligation to buy. You might then lease the property (retaining the option to buy it later for yourself if you choose to do so), and turn the property into a cash-flow cow. In negotiating the original transaction with the owner, you would agree to a specific purchase price. That way, your price is locked in even if the market value goes up significantly.

CREATE A PROFIT GOING IN

With the property now under your control, if you ‘do the math’ and the numbers make sense, you can go ahead with the purchase from the previous owner if there’s an opportunity to make a profit when you later sell. Let’s say you acquire a certain property on a Lease Option basis. Assume for discussion you agreed on a $500 per month rent and a $100,000 purchase price with the owner. You might then sub-lease the property out to a tenant for $650 per month and by monitoring the local market you might decide to buy the property at $100,000 as agreed. You then offer your tenant a Lease Option at an even higher purchase price of $125,000, perhaps with lease payments (or a portion of them) being applied to the down payment. Under that arrangement, your tenant will be better motivated to take care of the property (since they might one day be the owner). At the same time, you would be in a better negotiating position on the selling price. Your tenant could have the lease payments (or a portion of them) applied to the down payment. Under such an arrangement, you might negotiate a better selling price than otherwise, and enjoy a win-win transaction.

FISHING THE WATERS

The Lease Option Strategy is one of many real estate investment techniques. It works well in soft markets, where there are more properties for sale than there are buyers. Where you find a property owner with a low equity-to-debt ratio, and they need to rid themselves of the property, you might find the owner willing to do a Lease Option. It also works well where the local market is experiencing a high number of foreclosures. The ‘teaser rates’ that many lenders offered a few years ago are creating foreclosures around the country as the adjustable rates get increased. You might profit by using the Lease Options strategy in your favor in those real estate markets. Look for Lease Option opportunities in single-family homes as well as duplex and apartment buildings. With a property tied up in a Lease Option, this gives you time to arrange suitable financing or to find your own arrangement in which you buy the property whenever your tenant is ready to buy.