Real Estate Investing
One of the creative ways to start investing in real estate is to take advantage of the lease option. The biggest advantage of using the rental option to invest in real estate is –control. This method of investment, in principle, gives the investor the right to own – to be in control – and profit from the property without owning it.
A property lease option agreement is a combination of two documents.
Part of the lease agreement is where the landlord agrees to rent your property while you pay them rent for a certain period of time. During the tenancy period, the landlord cannot raise the rent, rent it to anyone else, or sell the property to anyone else.
The option part of the contract is the right to buy the property in the future at a specified price. If you decide to exercise the option to buy, the landlord must sell you the property at a negotiated price. The option part of the contract obliges the seller to sell the option to you during the term of the contract – but this does not oblige you to buy. You are obliged to pay the rent only as agreed during the term of the lease.
When the lease option agreement is properly written and structured, it can bring enormous benefits to the investor. If the tenancy includes a “sub-letting right”, the investor can generate a positive cash flow by renting the property to the tenant for the duration of the tenancy, or an option to rent the property to the purchaser for positive cash flow and future profits. If the lease option includes an ‘assignment right’, the investor may transfer the contract to another purchaser for a quick return.
Lease option real estate investing is a flexible, low-risk, highly leveraged investment method, which can be carried out at little or no cost.
It is highly leveraged because you are able to take control of the property and profit from it – even if you don’t have it yet. The fact that you are not the owner of the property also limits your personal responsibility and responsibility. Only if you decide to buy a property with the option to buy, will you take over the ownership of the property.
A hint of lack of money
The cost of a real estate investor to complete a lease option agreement with the owner requires little to no money out of pocket because it is completely negotiable between the investor and the owner. There are also many ways in which an option fee can be arranged. It can be built on a installment plan, balloon payment or any other agreed agreement between both parties. The option fee can be as small as $1.00.
In order to secure the property for purchase at a later date, tenants buying usually pay a non-refundable option fee of about 2%-5% of the negotiated future purchase price to the seller. Depending on how the option lease agreement is written and structured, the investor may possibly use the buyer’s lease option to pay any option fees due to the owner.
Rental option investing in real estate is a flexible investment method because terms and conditions such as payment amounts, payment dates, instalments, interest rates, interest-only payments, balloon payments, purchase price and other conditions are negotiated between the seller and the buyer. Obligations of both parties are also negotiable. For example, if the investor does not want to act as a landlord, he could specify in the tenancy agreement that the tenant-buyer will be responsible for all minor maintenance and repairs, and the seller will remain responsible for all major repairs.
Low financial risk
This is a low financial risk because if the property does not grow enough to make a profit, you have purchased the right to change your mind and let the “call option” expire. Even if your tenant buyer decides not to buy the property, you have benefited from a positive monthly cash flow from the tenant’s rent and a non-refundable option fee in advance.
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