what would be the advantage of doing a lease/purchase v/s doing a straight out flip. If you flip you get your profit up front. If you lease/purchase, you get minimal profit in terms of cash flow, which to me does not out weight the time value of money…Ie…having in now rather then later…and then you dont get your big profit until you sell a year or so later…then you always run the risk of the tenant not having adequate credit / down payment funds to close, then the whole equitable interest issue etc…
I can’t think of a situation where it would be any benefit to lease/purchase a deal, unless you’re in a hot market where you know the property is going to seriously appreciate in the next year.
I think you are wrong. You have all kinds of options. Here’s a challenge. Put down some figures and I’ll show you how a hold can far exceed a flip in profitability and it doesn’t have to be in a hot market.
For one, you are only thinking of immediate cash. Flips will usually outpace L/O’s, or any other holding method, in this area. However, L/O has many long-term tax benefits as well as cashflow in the long term that will exceed the amount a flip will give you. Plus, you canusually get a nice downpayment from a L/O to give you some immediate cash.
Let’s say you do 3 flips a year and make $10k on each. after 10 years you’ve made $300,000 and own nothing.
Let’s say you buy 3 rentals a year, averaging $100k each, mortgaged at 100%. Assuming 3% appreciation, in 10 years you own $3,100,000 in assets with mortgages totaling approx $2,800,000 giving you access to the same $300,000 of cash and together those rentals generate $360,000 in annual revenue for you.
not really, b/c in your scenario you speak of rental properties. w/ a L/O you would be out of the deal in 12-24 months.
Lets say I do 3 flips each year, 10k profit each, that 30k per year.
Now lets say I acquire 3 L/O deals per year. 3k option fee up front (avg) and 200.00/month profit on rent after PITI.
Thats 12k in option fees + 7200.00 in rent monies over 12 months = 19,200.00. Now lets say you bought those homes at 100% of market value. assume 3% appreciation on 12 months. that 3k per home x 3 homes = 12k in profit as the sale. 12k + 19,200 = 31,200.00. Slightyl better, but you still run more risk on the l/o as I pointed out in the orig. post.
I’m sure I’m missing something here, but I need someone to tell me, If I’m going to “get it”
i guess you’re right re the mtg. interest, but isn’t there a cap on how much interest you can deduct each year? Also, would it make sence to structure a 24+ month L/O out of the gate? I’ve heard of people structuring the deal out to 60 months.
i guess you’re right re the mtg. interest, but isn’t there a cap on how much interest you can deduct each year?
No idea. Mark would definately know.
Also, would it make sence to structure a 24+ month L/O out of the gate? I’ve heard of people structuring the deal out to 60 months.
60 months seems a bit long to me on the sell end. Who knows what the area will do (and how much the property will be worth) 5 years out. Imagine selling to a TB’er assuming the market appreciates 3%/yr, and it actually appreciates 5%, 10%, or more? Ouch! Of course, you could always structure your agreements to recapture some of the equity, but still.
I think I want to focus on flips and have L/O as a product I can offer case by case. I presently have an FHA lender friend of mine refering me his purchase turndowns. If they are looking at the “right” property, I can buy it L/O to them and turn it in 12-24, assuming they clean their credit up a bit. I also have a credit repair company in town that I set them up w/ and I pay for that (200.00 1 time fee, and yes they do work b/c they cleaned my credit up, significantly)…I’ll just add 200.00 in junk fees onto the front of the transaction.
Just wanted to make sure I hadn’t missed something, McWagner writes “Let’s say you buy 3 rentals a year, averaging $100k each, mortgaged at 100%. Assuming 3% appreciation, in 10 years you own $3,100,000 in assets with mortgages totaling approx $2,800,000 giving you access to the same $300,000 of cash and together those rentals generate $360,000 in annual revenue for you.” I’m hoping there is a mistake in here or I’ve been figuring things out wrongly, by my calculations 3% appreciation per year over 10 years on $300k ends up at just over $400k not $3.1M.
I would NEVER lease option as a seller. It’s called “equitable interest” and judges and courts love it. It’s not safe for the seller or the investor. Use a land trust with a triple net lease and you can trade mtg int and property tax writeoffs for much higher rents. You can even offer future appreciation as an incentive and don’t have to worry about foreclosure in the event of default because your tenant has NO equitable interest. It’s a simple eviction. Your tenant can later refi rather than have to qualify for a purchase loan and you don’t have to worry about “repairing” his credit. Plus, the asset protection features protect you against liens and encumbrances, judgments, bankruptcies, etc.
3 houses per year for 10 years is 30 houses @ $100,000 each is 3 million. 3% appreciation is MUCH over 3.1 million probably closer to 4, but I was keeping the math simple.
I’d rather own 4 million in property than $300,000 cash after 10 years.
As Da Whiz has stated courts don’t look favorably on L/O. Particularly in Texas, where I am, but that’s state-specific. However, it’s still done all the time (though doesn’t make it the smartest decision). With a L/O it’s all on how you structure the deal. Typically speaking you get 3-5% upfront with a negotiated sales price and a monthly rent. The monthly rent is normally HIGHER than market rent with language in the contract to indicate that a certain portion of the monthly rent goes back to the buyer as a rent credit at the time of purchase. Also, your sales price should not be the same on a L/O as on a flip. You should be able to negotiate a higher sales price because you are taking the risk that property values could fall during that time and the buyer can walk. The higher risk means that you can up your sales price in many cases to increase your NET gain.
So to summarize:
With a L/O you should be profiting in the following areas - Higher sales price (normally 4-5% due to apprecation of property within a year. You negotiate this with the buyer). Higher rent than market rent (with language as a rent credit). Buyer pays down your mortgage for a year (minimal, but still a net gain for you on the sale of the property). Upfront option fee of 3-5% that will be refunded in the event the purchase goes through. This isn’t ‘profit’ perse but if the borrower walks or does not buy the property you should be able to keep this deposit.
Thse are all ideals and not all happen on every deal and in some cases none of them happen. That’s more of a fault on the design of the deal than whether L/O are better than flips.