Paydays with Lease Options

Paydays with Lease Options

The Versatility of This Powerful Strategy Will Really Fatten Your Wallet

With the typical lease option agreement, you have three paydays. Each one is detailed below.

Payday #1 — Option Money
Deposit
When people rent a property, they put down a deposit. And as the landlord, that’s not your money; it’s the tenants’ money, and it must be returned according to the conditions of the lease.

However, with lease-optioning, the optionee puts down option money. That is your money. If they exercise their option and buy the property, you need that money to close the deal as it will go toward their down payment. But if they walk away after the lease is up and don’t buy the property, YOU KEEP THE MONEY. No strings attached!

In some states, laws limit the amount of deposit you can collect from tenants. The market also influences that amount. It’s usually the equivalent of one or two months’ rent, but many sellers collect an option deposit up to 10% of the purchase price. Just remember this: With a lease option, you can ask for and receive as much option money as you want.

And one of the best parts is that you aren’t taxed on the option money until the option is exercised or the house is sold! But the option money will go toward the purchase of the property, so be sure to put it in escrow and have access to it, should the tenants buy the house.

Payday #2 — Their Rent Minus Your Payment
Let’s say your tenants start by paying you $1,100 a month, and you owe $650 on the mortgage–that means you are making $450 a month in profit. This is payday #2.

If you are doing a sandwich lease, this amount could be even greater. But we’ll cover sandwich leases in another issue. For this example, let’s assume that you own the house.

Payday #3 — Re-lease or Sell
Eight months after you’ve signed the lease option agreement, one of two things will likely happen:

  1. The tenant-buyers come to you and say, “We’ve been approved for a mortgage, and we’re going to buy your property.” Some landlords are bothered by this because they don’t ever want to lose the property. But think about this: They pay you $107,000, you pay the original owner about $82,500, and your profit is approximately $24,000 at closing. That’s a great deal! Don’t ever feel bad about getting paid.
  2. The tenant-buyers decide that they don’t want to buy the property or they can’t. Sometimes they will disappear in the middle of the night, as renters are known to do. This isn’t necessarily bad. You can turn around and re-lease the property. Someone new gives you another $4,000, $5,000, maybe even $6,000 as option money. You start over again with your three paydays.

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