Lease Option Real Estate | Million-Dollar Strategy

Let’s discuss the “Rent-To-Own” strategy. It is also known as “Lease with an Option To Purchase”, “Lease/Purchase”, and “Lease/Option”.

We will be discussing this as an Exit Strategy, not an Acquisition Strategy.

The nice thing with this exit strategy is you have the chance to get paid in 3 different ways!

First, we will discuss the investing exit strategy.

Next, we will discuss the numbers and how to potentially earn 1-million dollars with this strategy.

Then, you get some actionable steps to take for this strategy.

Lastly, you get one Resource to consider, which may be helpful to you.

This article will explain how you can get paid to lease option real estate, legitimate ways to consider activating a lease option real estate business, as well as answer some questions that you may have about this topic.

Related content:

Okay Let’s Rock…

It’s great to be able to consider different exit strategies to potentially profit from.

When your marketing uncovers a house with TERMS that will support a positive monthly rental cash flow, one exit strategy to consider might be offering the property “Rent To Own”.

It benefits the seller because it can attract many more potential buyers. We will discuss 3 potential financial benefits in a moment.

It benefits the Tenant/Buyer who lacks the upfront funds and good credit necessary to get financing to buy a house currently.

A comprehensive Lease Agreement and separate Purchase Agreement helps in case of default. That way, if the Tenant stops making their monthly payments, you can follow and enforce the allowable lease agreement eviction rules.

By having separate contracts, everything is detailed for each of the agreements.

The Lease Agreement details the terms such as monthly rent, lease term, and responsibility of each when it comes to repairs and maintenance.

The Purchase Agreement details the sale price, pertinent dates, and other items detailing the option and purchase of the property.

Decide if you want to offer a bigger incentive to buyers by offering a portion of the monthly rent to be credited toward the purchase price.

Make sure the contract outlines the tenant/buyers maintenance responsibilities and consequences should they default on either agreement.

Marketing the property and thorough tenant screening is essential. The marketing features not only the benefits of the property, but also the opportunity for the tenant to step into the chance for future homeownership with numbers and terms that work with their current financial situation.

Make sure your screening ensures that the selected Tenant/Buyers are financially capable of fulfilling the contract commitments. It is prudent to conduct a credit and background check. This helps you manage your Rent To Own business in a professional manner as you are acquiring insights into a tenant’s reliability and likelihood of successfully completing the rent-to-own transaction.

I always have Tenant/Buyers meet with a Loan Broker before entering into the contracts to determine if they will be able to get a home loan at the end of the rental term. Either way the potential tenant/buyer wins because they will receive valuable advise from the loan broker as to their current financial situation. The broker should advise the tenant/buyer as to what they must do to improve their credit score and down payment amount so they can eventually qualify for a home loan.

If the loan broker thinks they can qualify for a home loan by the end of the rental term, that means we can continue moving forward on the contracts.

When the loan broker does not think they are in the position to qualify for a home loan within the projected contract term, or any time soon after that, I will have a heartfelt discussion with the applicant. I don’t want to take upfront money from people with the dream of homeownership who will not be able to realistically fulfill on the contract. That is not ethical.

The good news for them is, after talking with a loan broker, they should have a much clearer understanding of what it will take for them to do to be able to qualify for a home loan down the road.

The 3 Potential Ways To Generate Income:

UPFRONT MONEY: Non-Refundable Option Consideration. This is down payment money that will help you recoup your property acquisition costs.
MONTHLY INCOME: Monthly positive cash flow from rent. This is rental income left over after all the expenses are paid such as home loan Principle, Interest, Taxes, Homeowners Insurance, Homeowners Association (HOA) Fees, Private Mortgage Insurance (PMI), etc.
BACKEND MONEY: When the Tenant/Buyer exercises their option to purchase the property, you will be paid the profit left from what you paid for the house originally, and the set price you contracted for in the agreement to sell the property (your profit).

Let’s do some simple math to highlight the potential money flow process. We will agree that there will undoubtedly be unique scenarios and expenses required with each deal that we won’t touch on in this example.

We just want to see HOW the money might be generated with a Lease/Option rent to own scenario when a real estate deal has potential.

You uncovered a distressed home seller. Their house was in pretty good shape.

It had a fair market value of $325,000.

The existing loan on the house was $255,000.

The home loan term had 26 years left and a fixed rate of 3.5%.

Monthly payment $1,350 includes Principle, Interest, Taxes, Insurance. (Yes there could be a Private Mortgage Insurance as well, but let’s keep it simple.)

You bought the house “Subject-To” the underlying financing.

You got the deed to the house and starting making the payments on the existing loan.

You paid the homeowners $15,000.

You paid $9,000 in closing costs. Here’s how we came up with that hypothetical amount:

(The average closing costs on a $300,000 house can vary depending on several factors, including the location of the property, the specific lender, and the terms of the purchase agreement. However, as a rough estimate, closing costs typically range from 2% to 5% of the purchase price.

When a real estate investor buys a house from a distressed homeowner and pays the seller’s closing costs while also covering the buyer’s closing costs, they typically incur a higher percentage of closing costs compared to a traditional purchase where the buyer covers their own closing costs.

The exact percentage can vary based on several factors, including the specific closing costs involved, negotiation with the seller, and local real estate practices. However, as a rough estimate, the investor may end up paying anywhere from 3% to 6% or more of the purchase price in closing costs.

Since you are not getting a new loan which makes up much of the closing cost percentage, but you are paying the sellers closing costs, let’s just say you paid 3% in closing costs.)

Obviously there will be other factors such as back payments, fees, repairs, etc. Again, let’s keep it simple for this hypothetical example 🙂

After the sale:

Once you got the deed to the property you began marketing it on a Rent-To-Own basis. This is also known as a Lease with an Option to purchase (Lease/Option).

Here are the terms you offered.

$25,000 upfront non-refundable option consideration.

(You paid the seller $15,000 and 3% in closing costs amounting to $9,000.

This allowed you to recoup your money and have some left over for other potential expenses. If your negotiations resulted in giving the sellers LESS that 15K, that would be more up front gross profit hitting your bottom line.)

$2,000 monthly rent.

(The underlying payment is $1,350. This is a gross monthly profit of $650 per month If your term was 24 months, that is a total gross profit of $650 x 25 = $15,600)

$340,000 future purchase price.

(The existing loan on the house is $255,000. That is a gross profit of $85,000)

Potential GROSS profit with this one deal:

$15,600 + $85,000 = $100,600

5-Year Plan To 1 Million: 2 deals per year

3-Year Plan To 1 Million: 3.3 deals per year

1-Year Plan To 1 Million: 10 deals per year

If you made HALF of $100,600 = $50,300:

5-Year Plan To 1 Million: 4 deals per year

3-Year Plan To 1 Million: 6.6 deals per year

1-Year Plan To 1 Million: 20 deals per year

Like I mentioned before, there a many variables that will be unique to the acquisition of the house you may decide to offer on a Rent To Own basis.

Once you have determined the location, demand, and pricing for similar houses for sale and for rent, you will have a pretty good idea of what you can charge for your property.

It all depends what the numbers are based on the terms of your purchase. If they will work with a Lease/Option exit strategy, then you have that to consider.

If not, you can always reference the 1-million-dollar strategy for the Day 1 Lesson: Real Estate Wholesaling.

Here are some actionable steps to take for this strategy:

Learn how to find distressed homeowner scenarios so you can uncover motivated home sellers.
Focus on the existing TERMS of the house. Determine the overhead the property requires. If that is LESS than what fair market rent would bring for this house, you may want to consider this strategy.
Search for other similar “Rent To Own” houses currently being offered in your area. Make sure your numbers will compete well for the buyers actively looking at the moment.
Work on practicing your negotiation skills so you can create win-win-win deals.

Helpful Resource:

To thrive with this “Rent To Own” strategy…

You need deals that generate positive cash flow – where monthly rent surpasses house expenses.

Here’s the secret: Uncover houses with low-interest home loans so you can purchase them ‘Subject-To’.

With this method, you step into the existing payments without the need to qualify for a loan.

Now’s the time to act so you can benefit from the historically low interest rates on millions of existing home loans.

Learn how to create lucrative Subject-To deals with distressed homeowners through my “Low Cost Dominator” course.

Acquire premium properties with minimal upfront costs and skip the hassle of new loan qualifications.

If you would like me to show you how to buy NICE HOUSES with little money…

Click here to check out my “Low Cost Dominator” course.
(Use coupon code “JAKE” to get 50% off).

You will never wonder how to put together deals that have the potential for a POSITIVE CASH-FLOW again.

Remember, whatever you are trying to accomplish, I know YOU can do it!

Mark Walters 3rd generation real estate investor