Have you heard about lease options as a way to make money with real estate investing? If not, you’re going to today! I’m going to teach you the three main ways, that are tried and true, to get paid with lease options. You’re going to love it!
Lease options are my bread and butter. I love teaching these to my students and helping them see the opportunity for their finances. Even better, I love training my students to recognize the incredible value that these offer to everyone (seller, you, and your tenant buyer). I’m all about the win-win-wins!
Though not everyone will need and benefit from a lease option, the fact is that it is a great choice for a lot of people in difficult financial situations. So, open your mind, give it some consideration, and see the potential!
What are lease options?
To start, lease options are not the same as a traditional mortgage arrangement. With a lease option, you, the investor, have a property that you want to sell, but not immediately. First, you decide that you want to rent it out for a time in order to build up your passive income. So, you offer what is called a lease option, which is “renting with the option to buy,” also known as rent-to-own (see this post for more in-depth explanation).
Usually you will provide your tenant buyers with a specific timeframe in which to buy the property; often 2-5 years. During this time they will pay you rent, and if they decide they want to buy within their designated timeframe, then you will close on the house.
The beauty of this setup is that it is a great opportunity for everyone involved. Not everyone can get a traditional mortgage because of bad credit, not enough credit, etc. This provides them with the opportunity to live in a house while they pay rent and build up their credit score. It helps to offer a bridge for people in need.
How Do I Get Paid with Lease Options?
Now, the fun part! Money. Once you have your property and have found a tenant buyer you will begin the process of the lease option. The three ways you will be paid by your tenant buyer are:
- Option Fee – a non-refundable fee that secures their rental agreement from you for the property they hope to buy in the future
- Monthly Rent Premium – the profit between what you are paid by your tenant buyer and what you owe monthly to the original seller of the property
- Final Sale of the Property – tenant buyer closes on the property and pays the predetermined value for the property that was agreed upon at the beginning of the rental period
Got it? Don’t worry, I’m going to break it down for you.
Case Study to See How Money is Made with Lease Options
Let’s say that you found an owner financed home to buy. Your initial agreement with the original seller was as follows: you bought it for $100,000, gave the seller no money down on it, pay rent of $750/mo, and you have 5 years to pay it off. The house is free and clear, and the seller has agreed that 100% of your rent will go towards your $100,000 principle over those 5 years (goes towards the principle). Also, the after repair value (ARV) of the house is $120,000, which is the price at which you list it.
Then, you find a tenant buyer for the property. You give the tenant buyer 2 years to get their mortgage (for the $120k). Their monthly rent will be $1000, and you will give them 20% of the monthly rent towards the principle. Also, the tenant buyer will give you 10% of purchase price ($12,000) as an option fee (non-refundable) prior to moving into the rental property.
The option fee is YOURS to keep.
You can give some of that option fee towards the purchase price, but that is your decision. In the event that the tenant buyer decides not to buy the house, that money is yours. You get to keep the option fee and all of the rent, even the amount that would have paid down the principle.
Let’s say in this case study, that’s exactly what happens. Your tenant buyer decides after one year that they no longer want the property, and they vacate.
If that happens, you then find another tenant buyer and do the same thing all over again. They will pay you another option fee and then begin paying rent all over again. Let’s say, this time, though, the option fee is $15,000 (non-refundable). The deal is otherwise the same: $120,000 for the property, 2 years to pay it of, and $1000/mo rental price with 20% towards the principle.
Can you see the money coming in?
At this point you have received $27,000 in option fees (non-refundable). That’s the first way you get paid. The second is through the rent premiums.
Every month you have received a $250 rent premium, which is the difference between the $1000 paid to you by your tenant buyer, and the $750 you owe to the seller every month. Let’s say that the second tenant buyer is ready to buy the property at the end of the second year. If the first tenant buyers were there for 1 year, and the second tenant buyer has been there for 2, you have made $9,000 from the rent premiums alone. Add this to the option fees and it is $36,000! That’s just between the option fees and the rent premiums.
Now, let’s look at the third way to get paid: the final sale of the property.
The second tenant buyer is ready to close at the end of their two years. They decide to get a mortgage and pay off their remaining balance. This means that you will be paid the remainder of the $120,000 purchase price by the tenant buyer. Also, you will pay your remaining balance to the original seller. Don’t forget, you’ve been paying down your principle every month with the $750. So, at the end of 3 years you will have paid down $27,000 and now will owe only $73,000.
Your tenant buyer, however, has also been paying down their principle owed. Let’s say out of their $15,000 option fee, you decide that $10,000 can go towards their principle balance. In addition 20% of their monthly rent for the two years has also been applied. That’s another $4,800. The combined total is $14,800 that will be deducted from the $120,000 leaving them with a balance of $105,200.
This is the final way you will get paid on this property. Since the tenant buyer is paying you $105,200 and you owe the original seller $73,000, the profit to you is $32,200. When you combine this with the $36,000 you have already made on the property (with the options fees and monthly rent premium) you have made $68,200 by the final closing. That’s nearly $70,000 from one house, in which you have NO money invested! That’s incredible.
THIS is why I love lease options.
I don’t know any agent in the world who can make $70,000 from a $100,000 house if they list it. Do you? No bank, no credit checks, no lengthy closing process. It ROCKS!
Are you ready to learn all about lease options so you can make great money, too?
I love teaching my wonderful ladies all about this and so much more! This is why I have created my course First Deal Done Fast, which is chock full of incredible information to get your passive income flowing. The course will teach you everything you need to know to get started with real estate investing and turn you into a pro.
You’ll connect with other amazing women who are determined to better their financial situation through real estate investing. And I’ll be with you every step of the way. Jump on board now and change the course of your finances today!
Lease Options are the Best!
There is nothing better than finding great deals to help people who need to bridge a gap. The bonus for offering such a service is that you are financially rewarded in the process. I hope you can see the opportunity that lease options provide. I can’t wait to hear all about your successes.