Creative Real Estate Investing— Part 2 —Lease Options

In case you missed Part 1 of creative real estate investing, here is the link.

The next strategy is definitely a little bit more advanced.  As you evolve in your investing you’ll realize that investing for capital gains is not always the greatest. You’ll continually have to generate new deals every time you need money.  That gets old.

Instead, there are better ways to make money out there, ones that require a lot less effort (other than the initial push) and will give you passive income.  Essentially, money that you don’t have to work for (like rent).  So this next strategy, although advanced, will help you earn that passive income if done correctly.  It’s still a method to use if you don’t have any credit and don’t want to put a lot of skin in the game, but there definitely more moving parts.  It’s called the lease option.

Lease Options—This is a more advanced strategy and involves the use of options and lease agreements.  An option in real estate is just like an option in stocks.  It gives you the right to buy a property at a certain price within a specific time-frame.  Options are secured by collateral, usually a small dollar figure. If you fail to execute the option during option time frame, your contract expires and the owner would keep your fee.  A lease agreement is just a rental agreement on the property.

To make the lease option work, you must find suitable properties to lease option.  These types of properties include landlords who don’t want to be landlords anymore and people who are moving for whatever reason and don’t necessarily need the money now. It’s ok to find properties that have mortgages in place, as long as the property isn’t upside down at this point.

Here’s the strategy for lease options in steps:

  1. Find a suitable property and owner.
  2. Make an offer on the property at a discounted purchase price using the option agreement.  Remember this gives you the option to buy the property, but you don’t have to. Make sure to have the option to buy last anywhere from 2-5 years so that you have sufficient time to eventually sell the property to an end buyer.
  3. Agree on the collateral.  The more collateral you have to put down on the property, the higher your risk in the deal, so keep it as low as possible.
  4. Lease the property from the owner. Once you have the option agreement in place, you have control over the property. Someone else cannot come and try to purchase the property while the option is in place because it clouds the title of the property. The owner may have a mortgage that needs to be paid so you’ll agree to pay him a certain amount of money per month because you are leasing the property from him.
  5. Find a buyer/tenant. Once the deal is in place, you now control the property even though you don’t own it.  You are paying the owner a monthly fee to use the property, which you can in turn, lease out to a new tenant (it’s called a sublease).   The new buyer should be one in the same as the tenant.  Maybe the buyer can’t qualify traditionally for a mortgage, or maybe they don’t have a huge down payment.  Whatever the reason, you can sell them your interest in the property (option) and you can lease them the property at the same time. The new tenants are buying the property over the long term (in which you charge a fee), and you’ll be making a few hundred dollars per month when on the inflated lease you have in place also.

To sum up the lease option, you can make money on the fee that you charge the new buyer of the property, and you can make money on the monthly spread that the tenant pays above what you are paying the owner.  And the most important thing is that it is passive income.

In the Part 3 of Creative Real Estate Investing, look for more traditional ways to invest in property that will provide you with more ways to create both capital gains and passive income.

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