It’s sad but true, investors don’t always follow our strategies and might find themselves upside down on an income property. This means there is a negative monthly cash flow and the mortgage payment is not completely covered by rents.
A lease option might be your way out of this situation. While this strategy is not appropriate for all properties, it’s worth a look. Who knows? It could get you right side up again.
Most people are more familiar when a lease option is called a rent-to-own. Same thing. This can be a great exit strategy for an under-performing property investment.
When you offer a lease option, you typically attract potential tenants with credit problems who think (possibly rightly so) they would have a hard time getting traditional financing. While this might seem troublesome on the surface, think about it from their perspective. If they’re interested in actually buying the property, you should be able to charge more than present market rents and the tenant will likely be longer term in nature and take more pride, therefore be less likely to tear the place up. These are good things.
Let’s define a lease option. A lease option is simply an agreement granting the tenant exclusive right to purchase the property at a certain price at a certain point in the future. They will have a designated time within which to exercise that option.
Here’s why it’s a good deal for the landlord. A typical lease to own option will ask for a 10% deposit, which the tenant hardly ever has, so the remainder that they can’t come up with is converted to a loan or note which can be collected in the event the agreement is violated.
You get better cash flow. The tenant takes all the risk.
