Real Estate Investing with Lease Options - Investing in Real Estate with No Money Down: Real Estate Investing, #2

Why You Should Read This Book

Most people get into Real Estate Investing, not because they want to be a Real Estate Investor, but because they want to make money. But most people don’t know where to start or don’t have the cash to get started in Real Estate Investing.

This book provides you will all the strategies you would need to get started in Real Estate Investing without using any of your own money. There are a lot of books out there that claim to show you how to get started in Real Estate Investing with no money down. But none of them, that I have found, focuses specifically on Lease Options as a strategy to do that.

In this book, you will learn the various ways you can acquire properties using none of your own money. You will learn the different types of Lease Option strategies and when to use each one. You will learn the different ways to make money in each Lease Option transaction. You will also learn the different types of exit strategies and how to protect yourself from losing money when you sell.

I will describe the different contracts that you can use when setting up a Lease Option transaction.

You will also learn that the most significant factor in successful Lease Option Investing is motivation and how to find motivated people. You will learn how to find and negotiate with motivated sellers and motivated buyers.

Hopefully, you find the information in this book useful. So let’s get you started the right way.

Why I Wrote This Book

Ihave been involved in Lease Options for over seven years now. I have made a lot of mistakes and lost a lot of money using this investment strategy. But after I figured out what I was doing wrong, I made lots more money using this strategy.

What I have found, too, is that there are a lot of preconceived ideas about how to do a Lease Option transaction. This idea usually comes from so-called experts who have done less than ten transactions and who are teaching this strategy.

I was giving a workshop one year, and it became apparent to me, listening to the attendees, that Lease Options is a perfect strategy for people who want to get started in Real Estate Investing. What also became evident to me is that a lot of people are making a lot of mistakes. Some mistakes are the same ones that I have made. Some were brand new to me. The other thing that became obvious to me is that people could have avoided a lot of those mistakes if they had just had more information. Information from someone that knows how to make money in Lease Options and someone who knows what it’s like to make mistakes and lose money.

I wrote this book hoping that it will help you avoid at least one costly mistake, and to provide you with a better opportunity to make more money.

What is a Lease Option Investment

Apopular type of real estate investing strategy is what’s known as Lease Option investing or Rent to Own investing. Both these terms are used interchangeably. For simplicity, I will refer to this strategy as Lease Option from now on.

A Lease Option Investment strategy is an investment strategy where a person rents the property from you, with an option to buy the property sometime in the future.  How it is structured is simple.

Either you acquire a property, or you already own a property that you want to convert into a Lease Option. For whatever reason, you decided that you don’t want to rent out that property anymore, so you make it a Lease Option.

There are lots of motivating factors why an investor wants to be in a Lease Option investment and lots of motivating factors why a tenant wants to do a Lease Option. The basic premise is that you buy a property, or you already have a property. The renter moves in and rents that property from you for a specified lease amount.  A portion of that lease payment may go towards their down payment, or may not, depending on how much deposit they have and how much down payment they are saving.

Usually, when the tenant moves in, they provide you with a nice upfront amount, referred to as an option consideration. You use that amount of money to secure their option to purchase that property sometime in the future.

The tenant rents the property from you for 3 to 5 years, depending on the terms of the agreement. There are all kinds of different scenarios that you might put together for a Lease Option.

After the three years, the tenant would buy the property for the previously agreed to price. That price must be determined at the start of the agreement, so when it comes time to buy the property in three years, there is no dispute over what that price will be.

So, it all starts with the option consideration payment. The tenant then makes monthly payments where they may build up a credit. Then after the three years, they purchase the house. During the three years, the tenants are leasing with an option to buy the property, thus the term Lease Option.

Why would someone want to do a Lease Option?

The tenant has many motivators. The main one is that they can’t get approved for a mortgage. It’s because they have bad credit or no down payment or both. Those reasons are usually a result of other things.

Maybe they lost their job, but now they have one. Perhaps they had a sickness or death in the family, but now they have recovered financially. Many different scenarios would determine why a tenant buyer wants to do a Lease Option.

As an investor, a Lease Option is an excellent moneymaker

You get the initial deposit (option consideration).

You get monthly positive cash flow. You can almost guarantee positive cash flow with these Lease Option deals because the tenant is usually paying all the costs plus a credit, as part of the monthly payment. For example, if your monthly payment is $1,500 to cover just the costs, and your actual lease payment is $2000, you are making $500 a month.

You get the back-end. Let’s say you bought the property for 300,000, and you sell it to your tenants for 330,000. The difference is $30,000.

While the tenants are renting, they are also paying down your mortgage principle

Lease Option is a win-win

It’s a win for the tenant because they get the property that they want now. They get a forced savings program to save for their down payment, and you help them build their credit score.

It’s a win for the investor because you now have an investment property that has very little maintenance associated with it. There are two or three income sources, and these deals are pretty much guaranteed to cash-flow.

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Chapter 1. The Real Nothing Down Deal

In this first chapter , I want to talk a bit about why the Lease Option approach is a nothing down deal.

Years ago, we heard about how you could buy a property with nothing down. People were talking about doing vendor take-backs or getting people to loan them the down payment. It really wasn't nothing down. Nothing down, in this case, meant that they were getting other people to help fund the down payment. It was nothing out of their pocket.

For example, in the case of a vendor take-back, the vendor was holding a second mortgage for them as the down payment.

Most of those types of transactions are gone now. Banks want you to have a certain amount of equity in the purchase. A certain amount of skin in the game. These days, it’s tough to get lenders to allow you to purchase without using any of your own money.

Another way to purchase nothing down is to go borrow money from friends, borrow money from your lines of credit, or borrow money from your credit cards. These nothing down deals weren’t nothing down. You were actually borrowing the money from other sources.

So when they say nothing down it really wasn't a nothing down deal.

WITH LEASE OPTIONS, there’s a huge opportunity to buy a property or to control a property with nothing down. One way would be for you to partner with another investor.

You find someone who has the money to invest. You, as the Lease Option expert, would partner with this guy. He would go out and purchase the property, and you would manage that property for that person until the end of the deal.

You now have a controlling interest in that property. Maybe you are registered on the title, or perhaps you’re not. It depends on how you structure the deal. But you now have another property in your portfolio that was purchased as part of your joint venture. And you put in none of your own money.

Another way to do Lease Options is through a sandwich lease. What that means is that you find a motivated seller who has a property they can’t rent or sell.

Maybe this seller had to move for some other reason. Maybe they found another job, and they can't sell the property for whatever reason. They are just normal homeowners.

Another reason might be that there’s no equity in the property, or maybe the Realtor was just really bad, and they weren’t able to sell it in time.

Now the person is carrying two mortgages ... two house payments. They have this old property to pay, and they have their newly purchased property also to pay. Or maybe they are just renting, which is still another place that they have to pay.

Maybe they did something really stupid, and they bought another house without selling their current home because the Realtor told them that they should be able to sell their current house fast.

The bottom line is that they are now carrying two homes. These people are very motivated.

In this case, what you could do is enter into an agreement with the owner. The owner could lease it to you with an option to buy. Then what you would do is rent it to somebody else, giving them an option to buy as well. You have now created what is called a sandwich lease. We'll cover that in another section.

Another option is that the