How much will you lose if you cancel the contract? Are you under a hard contract yet, or is your deposit still considered a reservation fee? If you cancel the contract now, can you get your money back?
If the amount on deposit is substantial and you can’t get it refunded, then consider how you might still make the deal profitable.
Since this property won’t cash flow for you as a rental, can you afford the monthly housing cost if you owner-occupy? Hold for two years as a primary residence, then sell for a tax free profit.
Under the current tax law, you could sell on a 24 month lease option if you wish and still keep the sale profit tax free as long as you meet the two of five year ownership and occupancy tests.
Use your tax free profit to acquire cash flowing rental property.
Another option available to you now is to proceed with your plan to purchase to flip. Will the lease option deal still give you a net profit when all is said and done? Will the option consideration, the interest rate spread, and the back end profit add up to a profit when the option is exercised? Your current housing cost for renting your apartment does not figure into the calculations. Run the numbers as a stand alone deal.
If a lease option deal still makes sense, then proceed with your purchase but tell the lender that you have changed your mind about the use of the property. Tell the lender that you no longer want to owner occupy the property. The lender may still give you the loan at the same interest rate, just changing the down payment and maybe charging a point for loan origination.
Unless your earnest money deposit is a nominal amount, don’t just walk away until you have explored all your options to still profit from the deal.
Note, that under current law you can occupy your primary residence at least two years, then convert it to a rental for a couple of years prior to the sale and still keep the sale profits tax free. This may change under proposed legislation the House has already passed. Under the proposed changes to the tax code, your “rental period” will reduce the amount of your sale profit that would otherwise be tax free under the current law.