How can I use lease options to my advantage? In what scenario?
You can sell on lease-option to buyers who can’t qualify for a loan. You still have to make sure you get good tenants, but the benefit is that you can usually get a little more money up front as an option fee which you don’t have to return if the buyer doesn’t exercise their option.
The other advantage is as a tenant-buyer they have more interest in the property so you could make most of the maintainence their responsibility.
I agree with reiauctions that he has correctly stated the theory of lease options. However, in many, if not most, markets you will end up waiting longer to find a tenant who has a security deposit and an option premium. If the rent lost while waiting for a tenant with this extra cash exceeds the rent you could have received from a regular tenant, then doing a lease option is not a good deal.
Most states require that the owner maintain rental property to a certain standard. Therefore, you can not legally shift this burden to the tenant-buyer. In addition, the vast majority of lease-options are never exercised. These tenants often do not accomplish the maintenance that they are required to do under the lease (which wasn’t legal to start with). Therefore, when the owner gets the property back, the property can have a LOT of deferred maintenance and maintenance that was incorrectly done. Additionally, having the tenant do maintenance, that is required by law to be done by the landlord, can raise many legal issues. Since the tenant was doing labor that was required to be done by the landlord, were they entitled to compensation? Worker’s comp? 941 withholding? Can they sue the landlord if injured doing the maintenance? You get the idea.
Good Luck,
Mike
Mike sounds like you don’t like lease options.
How does the rehabber get their money? Is it only throught the option deposit and the built up equity when the option is exercised? Do many rehabbers refi prior to doing a lease option? If they refi do they only take 80% LTV and leave equity for later so as not to have a mortgage that exceeds the rent (if that is what it is called in a lease option) being received?
Just a lot of newbi questions.
Rick
Rick,
I don’t have anything against lease options. I have done lease options and often offer them concurrently with normal renting. However, much of the information presented by the gurus on lease options is not realistic. They present the positive side of lease options but do not discuss the negative side.
When you do lease options, you are renting the property to a tenant and giving them the right to buy the property for a specific period of time at a specific price (or formula for price). Rehabbing has nothing to do with lease options. If an owner needs to do a rehab, they would do it just like any other rental - with their own money, borrowed money, etc.
The rental income from any rental (including a lease option) should be enough to cover the mortgage AND the operating expenses AND the desired profit.
Good Luck,
Mike
Mike,
But as the investor then on a lease option you are not going to get your serious payday except for the lease option fee and when the buyer (renter) exercises their option (hopfully), correct?
During the rental period are you looking to cover all expenses only or would it need to have a positive cash flow before you considered it for a L/O?
I am asking because it looks like in most of the deals layed out on here that the investor is going for the money at both ends but is not overly concerned with the cash flow as long as all their expenses are covered.
I added the rehab part in my last post because I don’t see how an investor could purchase low enough to have a positive cash flow unless the property needed work.
Rick
Rick,
When you are doing lease options, you are renting the property. Therefore, you MUST have a positive cash flow if you want to stay in business. Most lease option “buyers” will not exercise their option. They have bad credit and it won’t improve in the next year or two. Yes, the theory is that you will get a big payday when the option is exercised, but that is offset by the negative cash flow if you don’t have a positive cash flow. In addition, you are taxed on the gain when you sell.
Good Luck,
Mike
Mike,
Thats what I thought but as you mentioned in a previous post most of the L/O gurus never talk about the middle (renting part) they only speak of the money to be made on the ends.
Can you offset the gains by refinancing before you sell (establishing what I would consider a new purhcase price) or do they use the original purchase price plus rehab costs for their gains computation?
Rick,
The amount you have financed has absolutely nothing to do with the tax you will pay on the gain.
Mike
Mike,
Dosen’t it adjust the cost basis which the gain is calculated from;
Sale price - cost of house (mortgage) = profit (gains) hopefully
or does the cost remain at the original purchase price plus all rehab costs?
Rick
Rick,
The cost basis has nothing to do with the mortgage. You would have to talk to your accountant about which rehab costs would be included. There is a difference in repairs vs. capital improvements. I have an accountant and am not an expert in this area. However, I do know the mortgage payment has nothing to do with the gain involved in a sale.
Mike
I will be meeting with my accountant soon for my taxes and I will run this by him.
thanks for letting me tap your brain for a while.
Rick
Lease Options are a great way to invest in RE
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Upfront Cash
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Monthly Cashflow
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Tenants have a BUYERS mentailty
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Full Reatail Value “IF” they close…
Now if they default and on average 2 out of 3 will. You must get another buyer in there ASAP! Otherwise your stuck w/ the payments.