What is a Lease Option?
A lease option is a real estate investing exit strategy where you rent out a home to a tenant who might want to purchase the property in the future.
For the right to have the first opportunity to buy the property, you can ask for a fee from the seller, usually 3% to 5% of the home’s value.
While they might not end up purchasing the property, there are still benefits to you, as the investor.
The Basics of a Lease Option
As an investor, your goal should be to grow a portfolio of properties. Lease options are a great way to do this. You maintain ownership of the property, and all of the benefits that come along with it.
First, you find a property that is in good condition from a motivated seller who is willing to sell to you for a low price. The lease option is just one exit strategy for your investment, and based on the specifics of the property you can make the decision if it is the most profitable.
The goal is to market the property to renters who want to buy a home but don’t qualify . because of poor credit, not enough money for a down payment, or a variety of other reasons. Entering a lease option with you gives them an opportunity to work towards buying a home they might not otherwise be able to afford.
As we discussed above, the renter will pay you a fee for the first right to purchase the home at some point during their lease.
Benefits of a Lease Option
A lease option has many benefits to you as the investor. It is a great way to have real estate in your portfolio where you can cover any payments with the rent paid by the tenant.
Here are some of the main benefits:
- The fee that we discussed above is non-refundable. So, even if the tenant doesn’t purchase the house, this money is yours.
- Because you are renting and potentially selling to someone who cannot qualify to buy a home in the traditional way, you can charge a higher rent. When you do sell, it can also be at a premium price, putting even more money in your pocket.
- The tenants will see themselves more as homeowners than renters and will take good care of the property. They may even make improvements, which will benefit you if they don’t end up purchasing.
- As the owner, you get the tax benefits of owning a home. You also benefit from appreciation.
Disadvantages of a Lease Option
A lease option has mostly perks if you have the right property, but there can also be downsides.
- If the fair market rent for the home is lower than the monthly payment, you might have to put money in each month. In this case, you will have to crunch the numbers to see if it makes sense in the long run.
- If your local market enters a downturn, you will have to buy the property at a major discount to see an advantage to the investment.
To learn how to do a lease option deal step-by-step, I invite you to join one of my live events or my free online course, Investor kit. You CAN become a real estate investor without using your own money and credit, and I will teach you how.