Real Estate Leasing Options

Regardless of how experienced you are as an investor, real estate leasing opportunities can improve your portfolio significantly.

You may have heard the terms lease-option, rent-to-own, and lease-to-own. For all intents and purposes, they mean the exact same thing. A rent-to-own investment strategy requires a tenant to pay an upfront fee to get involved in the property, make a payment every month, and eventually take over as the owner.

“In real estate, the lease-option is a legal instrument between the investor/seller and a tenant/buyer,” writes Abhi Golhar in Forbes Magazine. “It involves a lease with a monthly rental amount due, but it also includes an option to buy — for a predetermined price — at any time during the agreement.

I understand the steps needed to make money in a rent-to-own situation. In fact, I used this strategy myself when I acquired my first apartment deal, so I can attest to its value. That’s why I enjoy sharing with you how to take advantage of this in a big way, with little to no money out of your own pocket.

To receive more information about my philosophy as an investor, get in touch by clicking here. When you are prepared to start investing, you can schedule a planning session.

And don’t forget to check out both volumes of my real estate investing book or my daily podcast, Best Show Ever.

cozy white house for rent

How to Acquire over 100 Properties in 24 Months Utilizing the Lease-Option Strategy

Bob Scott and Jimmy Vreeland, who are SFR lease-option investors that have secured over 100 distressed properties, most being purchased at 30 to 40 cents on the dollar, are two of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th.

 

I interviewed Bob and Jimmy on my podcast late last year and they provided their Best Ever advice, which is a sneak preview of the information he will be presenting at the conference.

 

What was Bob and Jimmy’s Best Ever advice? They explained how they were able to acquire over 100 properties in 24 months utilizing a lease-option real estate investment strategy.

What is a Lease-Option?

According to Wikipedia, in a lease-option, “a property owner and tenant agree that at the end of a specified rental period for a given property, the renter has the option of purchasing the property.” This lease-option real estate benefits individuals who cannot qualify for a traditional mortgage loan. And due to the financial crash in 2007, an estimated 80% of the current buyer’s pool couldn’t qualify for a mortgage, so there was an extreme need for other purchase options.

 

The main two reasons why these individuals are unable to qualify for a loan are (1) low credit scores or (2) not receiving a w2 paycheck. Jimmy and Bob stated that most of their lease-option tenants have more than enough monthly income to qualify for a loan, but they are just lacking in the credit or paperwork department. These are individuals who have the ownership mentality – they want to be a homeowner – and by giving them the lease-option, Jimmy and Bob are providing them with an avenue to do so.

How to Find Tenant-Buyers?

Jimmy and Bob find their tenant-buyers for lease-option real estate deals by listing their properties in three main ways:

1.vFlyer

 

vFlyer is a syndication site that automatically sends out listings to over 20 different websites, including Zillow, Trulia, and Yahoo Real Estate, which is a huge time saver.

 

1.Craigslist

 

They find that Craigslist is still a great source to find tenant-buyers.

 

1.Facebook

 

They post simple Facebook ads and, as a result, their phones ring off the hook! The marketing message is simple – “Lease-option, rent-to-own, bad credit is okay, no banks required.” When a potential tenant-buyer clicks on the Facebook ad, it sends them to a simple, clean, no distraction landing page, which has a two-step opt-in form, requiring their name and email. In the second step, the tenant-buyer will provide additional information, including how much they can put down, how much they can afford monthly, and the type of property they want.

How Long are Lease-Option Contracts?

Jimmy and Bob’s typical lease-option is 12 or 24 months because most people’s credit situations can be corrected in that time. On day one, after signing up, the tenant-buyer meets the mortgage broker and credit repairperson with whom they will be working. The goal is to have the tenant-buyer hit “The Four Pillars of Improving Credit” so that they can qualify for a mortgage loan and exercise their option to purchase at the conclusion of the contract.

The Four Pillars are:

  1. Cleaning up past credit issues
  2. Getting a checking account
  3. Getting a secured credit card
  4. Reporting the tenant-buyer’s on-time rent payments to the Credit Bureau for them using a service called Rental Karma

If the tenant-buyer hits those Four Pillars, they should be able to qualify for a loan within a year.

Example Lease-Option Scenario

Jimmy and Bob recently purchased some lease-option real estate for a total investment of $60,000. Four days later, they had a tenant in the property. The tenant signed a 12-month contract that required them to put down an $8,000 nonrefundable option deposit and to pay $1,500 per month in rent.

 

Using this example as context, here are the 3 main benefits of lease-option real estate investing over being a traditional landlord:

 

1.Nonrefundable Deposit

 

If Jimmy and Bob would have gone the traditional route, they may have gotten a refundable $1,200 security deposit, instead of the $8,000 nonrefundable deposit. Receiving $8,000 on day one on a $60,000 investment means they’ve already achieved a 13% return!

 

The nonrefundable deposit also serves as the tenants “skin in the game.” It incentivizes them to pay their rent on time and to honor the contract. If the tenant does walk away or needs to be evicted, the higher nonrefundable deposit mitigates Jimmy and Bob’s risk against those or similar situations.

 

1.Demand Above-Market Rents

 

Jimmy and Bob may have only gotten $1,200 per month going the traditional route, instead of the $1,500 a month with a lease-option real estate deal. Since they are targeting that 80% of the market that very few investors are talking to, they are able to get above-market rents. The difference between $1,200 and $1,500 a month is $3,600 a year in additional income.

 

2.Tenants Responsible for Ongoing repairs

 

In a lease-option situation, the tenant-buyer is responsible for ongoing repairs and maintenance. This not only increases the cash flow but also benefits Jimmy and Bob from a time management perspective. If something goes wrong in a traditional rental, you have to field that call from the tenant, figure out the issue, and coordinate to send a handyman or contractor out to the property. Many times, the tenants miss the appointment, so you have to coordinate with the handyman for a second time. Then, you get a call back from the handyman telling you the issue and the cost. However, Jimmy and Bob eliminate that entire time-consuming process by having the maintenance and repairs be the tenant-buyers responsibility.

Conclusion

Lease-option real estate is when a tenant signs a contract with a property owner and has the option to purchase the property either once it expires or once they qualify for a traditional mortgage.

 

When Jimmy and Bob have a property that needs to be leased, they find the majority of their lease-option tenants using vFlyer, Craigslist, and Facebook ads.

 

Lease-option contracts are usually 12 to 24 months in duration. Once the tenant achieves the “Four Pillars of Improving Credit,” they will qualify for a loan and be able to exercise their option to purchase the property.

 

The three main advantages of lease-options over traditional buy-and-hold investing are larger and nonrefundable deposits, above-market rents, and tenants are responsible for ongoing repairs and maintenance. Just remember to get all of your agreements with the tenant in writing!

 

For other types of rental properties, such as apartments, read more here.

ocean town real estate investing

Two Creative Rent-To-Own Strategies with NOTHING Out-of-Pocket

 

Rent-to-own, lease-to-on, lease-option: they all mean the same thing. Bring in a tenant who pay an upfront fee to get into the property, make monthly payments over an agreed upon period of time, and eventually buy the property. Real estate investor Jon Simcoe has put a new spin on this standard rent-to-own strategy, and in our recent conversation, he explained the two strategies he implements and the big paydays that come as result of his creativity.

 

Rent-To-Own Strategy #1 – Tenant First

 

The first, and strongest rent-to-own strategy that Jon implements is “tenant first.” For this strategy, he starts with the tenant and then finds a property. Tenants will work with Jon for one of two reasons: (1) they don’t have a high enough credit score or (2) they don’t have a large enough down payment to qualify for a bank loan. So, they come to Jon and he helps them buy a house of their choosing that aligns with their financial situation and one that they will be able to purchase after two to three years.

 

In return, Jon requires the tenant to provide a non-refundable down payment to initiate the contract. This goes towards the down payment that can be used to purchase the property at the end of the contract. But if they decide not to buy, Jon gets to keep the money. The tenants are also responsible for paying monthly rent, plus an additional fee. The rent is not applied to the purchase price, but the additional fee gets added to the non-refundable down payment so that at the end of the contract, the tenant should only have to bring a small amount of funds, if any, to the closing table.

 

Allowing the non-refundable down payment and the added fee to be applied to purchasing the home is one of the ways that Jon sets his tenants up for success. Another service he provides is a credit specialist that meets with the tenant every three months to make sure they are doing everything they can to get their credit score to where it needs to be.

 

 

Rent-To-Own Strategy #2 – Property First

 

The other rent-to-own strategy is “property first,” which Jon follows when the market and economy is trending downward. Jon will find properties from distressed owners. Then, he finds someone to rent-to-own the home off of the current owner. Unlike “tenant first,” for this strategy, Jon doesn’t need to buy any of these properties. He just finds both a motivated seller who will keep the existing financing in place and a capable rent-to-own buyer and facilitates the transaction between the two parties.

 

How Jon gets paid for this “property first” strategy differs from the “tenant first” approach. Since he isn’t purchasing the property, he keeps 10% of the rent paid and sends the rest to the owners. Part of that 10% goes to Jon’s credit specialist who, like “tenant first,” makes sure the tenant’s credit is moving in the right direction. He also charges the original owners an initial set-up fee, as well as a $10,000 “successful outcome” fee after the tenants purchase the property.

 

 

Rent-To-Own Strategy Comparisons

 

Strategy #1 – “Tenant First”

 

  • Income – Non-refundable down payment + monthly rent + profit when tenants purchase
  • Required to purchase the property – Jon leverages bank financing and OPM (other people’s money) to minimize or completely eliminate his money out-of-pocket + Jon benefits from the mortgage getting paid down
  • Higher profits – $50,000 to $70,000 per deal on average, but sometimes $100,000 and up
  • ROI – 40% to 60% on average, based on down payment. If using OPM, Jon has to pay 10% to 15% to partners and then the rest is his.

 

Strategy # 2 – “Property First”

 

  • Income – Initial set-up fee + 10% of rent paid + $10,000 at closing
  • Not required to purchase the property – current owners keep existing mortgage + Jon doesn’t benefit from mortgage getting paid down
  • Lower profits – $25,000 to $30,000 per deal on average
  • ROI – Infinite since no money out-of-pocket

 

As you can see, with a little creativity and resourcefulness, you can implement both of these strategies with little or no money out-of-pocket.

 

 

 

 

lease-option

How to Acquire over 100 Properties in 24 Months Utilizing the Lease-Option Strategy

 

Did you know that due to the financial crisis in 2007, an estimated 80% of the current buyer’s pool can’t qualify for a mortgage? And unfortunately, most traditional investors and agents are missing out on this unfulfilled market need. However, Jimmy Vreedland and Bob Scott identified this need and tapped into that 80% by following the lease-option strategy. In our recent conversation, Jimmy and Bob explained how they were able to acquire over 100 properties in the last 24 months utilizing lease-options.

 

What is a Lease-Option?

 

According to Wikipedia, in a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. The lease-option best serves that 80% of individuals that cannot qualify for a traditional mortgage loan. The main two reasons why they are unable to qualify for a loan are due to (1) low credit score or (2) not receiving a w2 paycheck. Jimmy and Bob stated that most of their lease-option tenants have more than enough monthly income to qualify for a loan, but they are just lacking in the credit or paperwork department. These are individuals that have the ownership mentality – they want to be a homeowner – and by giving them the lease-option, Jimmy and Bob are providing them with an avenue to do so.

 

 

How to Find Tenant-Buyers?

 

Jimmy and Bob find their tenant-buyers by posting open listings in three main ways:

 

  1. vFlyer

 

vFlyer is a syndication site that automatically blasts out listings to over 20 different websites, including Zillow, Trulia, and Yahoo Real Estate, which is a huge time saver.

 

  1. Craigslist

 

They find that Craigslist is still a great source to find tenant-buyers.

 

  1. Facebook

 

They put up simple Facebook ads and their phones ring off the hook! The marketing message is simple – “Lease-option, rent-to-own, bad credit is okay, no banks required.” When a potential tenant-buyer clicks on the Facebook ad, it sends them to a simple, clean, no distraction landing page, which has a two-step opt-in form, requiring their name and email. In the second step, the tenant-buyer will provide how much they can put down, how much they can afford monthly, and the type of property they want.

 

 

How Long are Lease-Option Contracts?

 

Jimmy and Bob’s typical lease-option is 12 or 24 months. Most people’s credit situations can be corrected in that time. On day one, after signing up, the tenant-buyer meets the mortgage broker and credit repairperson that they will be working with. The goal is to have the tenant-buyer hit “The Four Pillars of Improving Credit” so that they can qualify for a mortgage loan and exercise their option to purchase at the conclusion of the contract.

 

The Four Pillars are:

 

  1. Cleaning up past credit issues
  2. Getting a checking account
  3. Getting a secured credit card
  4. Reporting the tenant-buyer’s on-time rent payments to the Credit Bureau for them, using a service called Rental Karma

 

If the tenant-buyer hits those Four Pillars, they should be able to qualify for a loan within a year.

 

 

Example Lease-Option Scenario

 

Jimmy and Bob recently purchased a property for a total investment of $60,000. Four days later, they had a tenant in the property. The tenant signed a 12-month contract that required them to put down an $8,000 nonrefundable option deposit and to pay $1,500 per month in rent.

 

Based on this example, here are the 3 main benefits of lease-options over traditional landlord:

 

  1. Nonrefundable Deposit

 

If Jimmy and Bob would have gone the traditional landlord route, they may have gotten a refundable $1,200 security deposit, instead of the $8,000 nonrefundable deposit. Receiving $8,000 day one on a $60,000 investment means they’ve already achieved a 13% return!

 

The nonrefundable deposit serves as the tenants “skin in the game.” It incentivizes them to pay their rent on time and to honor the contract. Also, if the tenant does walk away or needs to be evicted, the higher nonrefundable deposit cushions Jimmy and Bob against those, or similar situations.

 

  1. Demand Above Market Rents

 

If Jimmy and Bob would have gone the traditional landlord route, they may have only gotten $1,200 per month, instead of the $1,500 a month. Since they are targeting that 80% of the market that very few investors are talking to, they are able to get above market rents. The difference between $1,200 and $1,500 a month is $3,600 a year in additional income.

 

  1. Tenants Responsible for Ongoing repairs

 

In a lease-option situation, the tenant-buyer is responsible for ongoing repairs and maintenance. This not only increases the cash flow, but also benefits Jimmy and Bob from a time management perspective. If something goes wrong in a traditional rental, you have to field that call from the tenant, figure out the issue, coordinate to send a handyman or contractor out to the property. Many times, the tenants miss the appointment, so you have to coordinate with the handyman for a second time to come out. Then, you get a call back from the handyman telling you the issue and the cost. However, Jimmy and Bob eliminate that entire time consuming process by having the maintenance and repairs be the tenant-buyers responsibility.