A Killer Investment Strategy: the Three Sources of Cashflow From a Lease Option Strategy

Once you own an investment property, or a piece of investment real estate, then you need to make money from it. If you're not going to sell it on, then you would typically rent it out to a tenant. The rent covers the mortgage payments, with perhaps a bit left over for repairs and so on, but it's rare for a landlord or property investor to make any significant monthly cashflow.

A solution to this lack of cashflow is to utilise lease options, also known as the rent-to-buy, or rent-to-own strategy.

There are many people who, for one reason or another, simply cannot get a mortgage. Perhaps they have no credit score as they've just come in from abroad. Perhaps they've had financial problems in the past. And they're stuck - they're saving towards a deposit, but all the time they're waiting for a bank to accept them, house prices are moving up and away from them.

Now, you can offer them a solution!

You take them on as tenants as normal, paying rent as normal. However, you also sign a lease option with them. This gives them the right (but not the obligation) to buy the house from you within, say, two years, at a price you fix today.

(Since I buy all my investment properties at least a 20% discount, I generally fix my lease options at a little over the current open market value of the property. This way, I lock in my profit from Day 1, and at the same time hand over most of the capital growth for the next two years to the tenant. I like to spread the wealth whenever I can!)

In return, they pay you a deposit of 3% - 5% of the value of the property when they move in, plus they pay about 20% on top of the rent every month. In this way, they build a deposit with you over the two-year period, making it even easier for them to complete on the purchase in two years time.

Meanwhile, your cashflow has gone from virtually non-existent to amazing! Plus, you have tenants who pay on time and love you for helping them out! A true win-win!

That's the overall concept.

Let's now break it down into the three ways in which you can profit from a lease option strategy.

1. You agree to sell the property in two years time at today's market value. Since you bought at well below market value, you are immediately locking in your profit.

Specifically, let's say you bought a £100,000 house for £80,000, you set the price on the lease option for £105,000 (the extra £5,000 covers costs) and your profit of £20,000+ is locked in.

2. Your rent-to-buy tenant gives you between 3% and 5% of the agreed price, depending on what s/he can afford.

To continue with the example above, your rent-to-buy tenant will pay you between £3,150 and £5,250 the day they move in.

3. Each month, for two years, your tenants will give you 20% on top of the market rent you charge them.

Again using the same example, if the market rent is £500 a month, then you will collect this as normal plus an extra £100.

Let's now fast-forward two years. Your tenants are now in a position to apply for a mortgage to buy your house from you. Here's how it looks for them now...

Agreed Purchase Price: £105,000

Deposit Paid:

- initial deposit: £5,000

- 24 x £100: £2,400

Total Deposit: £7,400

Amount Left owing: £97,600

Assuming zero growth in capital value over the two years, your tenant now only needs to find a 93% mortgage to complete the deal. If the property has increased in value, then obviously their loan-to-value amount will drop accordingly.

In addition to a locked-in profit, a healthy 'moving-in' deposit, and good monthly cashflow from the 20% extra payments, there are other benefits to the lease option strategy, too.

* Tenants will often take on renovation projects for you, as they see it as their home. Instead of paying them for doing the work, you simply give them more equity in the property.

* As your tenants move in to their home, rather than a rented property, they treat it better, do repairs and maintenance themselves, and hence require virtually no management input.

* There's a clause in the lease option that gives you the right to terminate the option in the event of any payments being late. Again, this drastically reduces your management costs.

You can see now that for good cashflow and ease of management, lease options are streets ahead of any ordinary buy-to-let strategy out there.

Now, lease options are relatively new in the UK, and it's unlikely that your local friendly solicitor will know much about them.

You want access to a solicitor who knows all about them, and who has the paperwork drawn up already. You also want to learn everything about lease options direct from the man who brought them over from the US in the first place.

To learn more from "The Lease-Option Master", and for a free, 5-part mini-course on this super-profitable cashflow strategy, simply click here...

http://www.maverick-investor.com/rent2own

Rate this Article: