Here's How To Make Money With Lease Option Investing

Sometimes you will hear these two terms used interchangeably yet they are not exactly one in the same. There is a key difference you need to be aware of.

First, let's talk about what an option is as it relates to lease options. It is the right to buy, but not an obligation, at a future date for a pre-determined price.

So a lease with option to purchase is leasing a property with the right (option) to buy it at a later date.

A lease purchase on the other hand is a lease with an obligation to buy.

There in lies the rub. One carries no obligation to purchase the home while the other creates an obligation. Now that we have that out of the way, let's look at how you can profit from lease options.

Investing in Real Estate With Lease Options and "Subject-To" Deals :
Powerful Strategies for Getting More When You Sell, and Paying Less When You Buy

Let's look at how you make your money in a Lease Option:

Equity Build-Up- Each monthly payment reduces the principle loan amount on the property. As the outstanding loan balance drops, your equity increases.

Positive Monthly Cash Flow - In essence, you are financing the purchase of the property for the tenant. Because the renter has the mindset of being a property owner (their goal for leasing the property in the first place), they will pay more then the average rent for an area. This is an important point. The mentality of a tenant in a lease option agreement is very different then a person who is a simple renter.

Appreciation - Like the old saying goes, "They aren't making any more land." Yes, real estate has its up and down cycles. Yet if you look at the overall trend, real estate values have been steadily moving upward for the past 50 years.

Tax Savings - It's no surprise that an owner/seller is entitled to the usual tax savings associated with investment property. The flip side is that if a deal is structured correctly, a tenant/buyer can also gain tax advantages as well. It is known as a triple net lease (NNN) and essentially makes the tenant responsible for all the property expenses (mortgage, taxes, maintenance, etc). Talk to your tax adviser to learn more.

Upfront Money (Option Consideration) - The Option Consideration is defined as follows: Option money is the non-refundable funds paid up front from the tenant/buyer in order to make the deal binding. In order for any contract to be binding and irrevocable, there must be a commitment by both parties in either payment and/or performance.

The amount of consideration is up to you! Word of caution... keep your greed gland under control. Ask for too much upfront money and you risk disqualifying many potential candidates. A few thousand dollars is reasonable and you can take it in a lump sum or divide into installments paid over a period of time.