I’m a little confused about “Rent Credits” and how and why they’re used. I’ll lay out this example to ask my question:
You L/O a house w/ a $900 mortgate payment. You turn around and L/O that house to a tenant-buyer for $1100 a month.
I’ve always been under the impression that the entire $1100/mth the tenant-buyer is paying goes toward the purchase price. Is this incorrect?
Or is the $200 the TB is paying on top of the mortgage what’s referred to as the “Rent Credit”?
If a worse-case scenario of only being able to rent out the property for the same $900/mth you’re paying for it were to occur would the TB then not get any “Rent credit”?
You’re wrong about the money going toward the purchase price. . . and you’re paying a lot more for that property than $900. How about maintenance and repairs? What about renter’s insurance for your tenant? How about collecting rent? Are you going to do it? Are you going to pay a property manager? What happens if your tenant is late or doesn’t pay at all? Did you take into account the possibility of a vacancy? $900? I don’t think so.
As to lease options, they are great for the tenant but perilous for the seller (you). Rent credit and option deposits over 1.5 times the monthly payment = “equitable interest” for your tenant and a big headache for you. Keep reading.
Here’s a horror story about a lease option told, not by a newbie, but by an investor who has bought more than 100 homes:
Note to moderators: this link is not to any website that sells anything. It is simply to an article written by a Salt Lake City realtor/investor that is pertinent to this topic.
I appreciate your input and all, Wiz but I think my question is far more straightforward than your answer.
What about Maintenance and Repairs?
I plan to stipulate with my tenant-buyers that they’re responsible for the first $200 of m&r in any given month.
How about collecting rent?
They can mail me a check
Are you going to pay a property manager?
No
What happens if my tenant is late or doesn’t pay at all?
I’ll start the eviction process
Did I take into account the possibility of a vacancy?
Somewhat. To get myself into an option in the first place I’ll have a tenant-buyer in place first.
Now, I’m new around here but it seems to me like you’ve said your peace on equitable interest plenty…
In fact, in the Subject2 / Lease Option forum alone you’ve mentioned your horror story in ThreeSeparate Threads in the last week…
pepemt…here’s how rent credit works. To use your example, you get a house for $900 and you turn around and lease option for $1100. You have to create a spread in the purchase price. For example you sign the property up with a discount for $100k, the market value is $110k you now have a 10k spread. This is where your option money and rent credit will come from.
Example:
$3000 option consideration
$1100 a month with $500 a month rent credit
$110k purchase price
$110,000 purchase price
3,000 option consideration
6,000 rent credit ($500x12months)
$101,000 price when option is exercised
in this example when your buyer buys you’ll also get $1,000 at closing.
Hope this helps
so the $200/mth the tenant-buyer is paying on top of what I’m paying on behalf of the Seller’s mortgage is pure profit for me? The only money toward the purchase of the property comes from the $500 extra he’s putting on top of the $1100?
That’s standard practice in the lease-option world? In your example I really would have always thought that the TB would be getting $700x12mths toward the purchase price…
