I’ve been reading this forum for a few days now. I’ve read alot about the dfiferent ways to start of as a REI. I’ve found that L/O’s would be a good place to start… Although i have a few questions before i dive right in.
Something i dont understand about the L/Os is if someone for example, has $5k or more to put down as a non refundable deposte then why would this person want to rent to own from you or me when they could just about buy their own home without the rent to own situation, basically cutting me out of the picture? Am i missing something?
For example, If i purchase a house in California for say… $350,000 i try and buy this house with almost no money down and just pay the closing fees… I turn around and rent-to-own this house out to someone. If i advertise this will my phone really ring off the hook? or is this L/O a thing of the past? Say, i do find a potential “Buyer” and they have that $5k+ to put down. I dont understand why would they want to waste there time with my lease Option plan if they could go and buy a house without having to Rent it from me for a year term.
Could this be done with any house that is for sale on the market now. Even in California? Of course if i find a house below market value i will be getting a better profit, but if its just any old house thats on the market purchased for market value will the lease option still work and make profit?
People who Rent to Own have something in their past that won’t allow them to get aproval for a mortgage RIGHT NOW! For example, Low FICO Scores. But when they Rent to Own your property, you are leasing the house to them for a year or two, to give them time to fix their past credit “FICO SCORE” and then purchase the house if they choose to. Basically what they are doing in a L/O is giving you 5k as the down payment “OPTION MONEY” and they pay you each month RENT CREDIT to lower the cost of the house down! see below
Property $100,000
Option $ 5,000
Rent Credit “SAY” $200/mo
Lease Term 18 mo
cost of house at end of lease $91400…
So instead of getting a loan for 100,000 they can get a loan for 91,400.
Make a little more since?? Kinda??
This is a good way to REI, but instead of purchasing the house yourself, try doing a sandwitch L/O, which means you just control the house and L/O to a T/B and make a good profit on it!!!
If you are in cali, cali has alot of people out there that have the funds but don’t have the credit right now!!!
Property $100,000
Option $ 5,000
Rent Credit "SAY" $200/mo
Lease Term 18 mo
cost of house at end of lease $91400…
So instead of getting a loan for 100,000 they can get a loan for 91,400.
Just making sure i understood of the above example…
Say there rent is $1800 a month and they give you a rent credit (Rent credit is optional?) of $200 which makes there payment $2,000 a month and that is deducted from the initial 100k over 18 months? So, 200 x 18 = $3,600. Is this correct?
If this is correct then how do you make some money on the monthly payment?
Somewhere on this forum i read you can make money:
A) Non refundable down payment
B) small amount (Depending on how much you purchased the house for) but montly payment.
C) When the LO expiers and the owner is ready to purchase the house
Also can you give me another example making money at the leases end ( selling the house) with say $30k in equity in the home?
If their rent is $1800.00, the rent credit comes from that money, it’s not added to it. In other words, of that $1800.00, $200.00 is put toward the purchase price of the home IF THEY DECIDED TO EXERCISE THEIR OPTION LATER AND BUY IT.
Making money on the monthly payment is simply done by charging more rent than is necessary to cover the owner’s PITI payments. Let’s say in this case that you are going to be paying the owner $1600.00 to cover his prinicple, interest, taxes and insurance. You have $200.00 left over per month as positive cash flow for YOU! The $200.00 Rent Credit comes out of the “spread” you created when you negotiated the best price on the house you could get.
Example…$100K property
Value = $125K (example)
Your “spread” is $25K. Do whatever you like with this money - give rentr credits or keep it on the back end.
If you have $30K equity when the lease is up, that could go to the TB, if you haven’t set it up right.
Let’s say the house is valued at $125K when you meet the owner. He’s willing to give it to you on a LO for a year at $100K. You have a $25K spread. You can now LO it to a TB for “say” $135K (value in a year). If the property goes up 15% to $143, 750, then $8750 “equity” goes to the TB when he buys it from you at $135K. You pay the owner his $100K and keep whatever is left of the $35K you built in as your spread. Remember, you have to subtract the $5K option money already paid you and also subtract any rent credits you built in, too.
i’m a bit confused by the L/O as well. as the investor do you purchase the property and then do a lease option? or are you somehow just acting as a middle man between property owner and tenant you find? what’s a sandwhich?
as the investor do you purchase the property and then do a lease option?
Yes, you can purchase the property first and do a lease/option, or you can do a sandwich lease/option (see below).
or are you somehow just acting as a middle man between property owner and tenant you find? what’s a sandwhich?
You basically defined a sanwich L/O here. A sandwich L/O works like this (with varying degress) … You locate someone who is willing to sell by L/O. You get terms that are beneficial to you - for example, a longer term (4-6 years), a purchase price equal to today’s FMV, low/no option consideration) or whatever. You also write the agreement in terms that allow you to sub-lease the property. You then find a T/B and again make the terms beneficial to you (e.g., 1-2 year terms, 3-5% option consideration). You can also have the T/B agree to pay for items costing <$200 and have the seller agree to fix items that cost >$200 - therefore, you encounter no out-of-pocket repair expenses. If the T/B’er exercises their option, you turn around and exercise your option. If not, you get another T/B’er in at the end of their option. Keep doing this until your option period expires, or a T/B’er exercises their option.
Thanks for reply! Nice and succinct. Sounds pretty straightforward. How difficult is it to get owners to agree to the subleasing deal i.e., do they mind you making money off their spread like that?
They won’t mind at all if they have to sell and you want to buy ! ;D
Remember, noteverybody will be willing to do this with you. Your seller has to be “motivated.” If there’s no NEED to sell, you are not going to convince somebody to lease their house to you for a year or 4.
If I wanted to sell my house and you can to me and said, “I’ll buy it from you, but you’ll have to become a landlord first for 3 years,” I’d kick you out of my house.
If, however, I just lost my job, got a divorce or some other life-altering event happened to me, I might NEED to sell it and just want you to take it off my hands. THAT’S motivation.
NEED to sell and WANT to sell are VASTLY different. Find out WHY they need to sell and structure you deal around it.
Nobody is going to mind you making money if you are helping them out of a tough situation, believe me.
