Rental property investment has created many comfortable early retirement lifestyles for real estate investors. However, it can be tricky to get started if you don't have the cash to fund the down payment and purchase the home. This can even happen to experienced investors who have temporarily exhausted their ability to leverage and get financing.
Using a lease-to-own strategy, a real estate rental property investor can control a home and generate positive cash flow from leasing it out. There are some required characteristics to make this kind of deal work:
- Right home - this would be a home that will attract a tenant, and one with a mortgage balance below current market value.
- Motivated seller - for whatever reason, the seller hasn't been able to find a buyer who will pay enough to get them out of the mortgage and pay costs of sale. They need to sell.
- Ready tenant(s) - the investor locates the home then locates tenants who want to rent it. They're ready to move in when the deal is completed for the lease-option.
- Positive cash flow - the lease-to-own rental amount must be lower than the lease amount the new tenant will be paying, meaning a positive monthly cash flow.
- Lease option deposit - since a lease option non-refundable payment will be made by the investor to the seller, the investor will want to get first and last months rents to offset as much as possible of this payment, or all of it. This is the only cash that the investor will be out-of-pocket.
- Lease length - a long enough lease on both ends to keep the investor profitable until the financing can be obtained to buy the property.
Basically, the real estate investor doesn't have the cash to buy the home, nor for an adequate down payment at this time or ability to get a mortgage. When a good rental home opportunity arises, the investor wants to take advantage, so suggests a lease option to the owner. At the same time, the investor is marketing for a tenant to have one ready to move in as soon after the owner moves out as possible. Here's an example of how it can work:
- The investor locates a motivated seller with a home they haven't been able to sell. They have owned it a while, and their mortgage payment is $775/month. They need to sell and move for jobs.
- The investor suggests a lease purchase for three years, with the option to purchase the home at the end of that time for a price the investor expects to be a true value, and the owner is willing because they haven't been able to sell.
- The investor offers a $2000 lease option non-refundable payment and $775/month to lease the home through the entire 3 year period. The homeowner sees a way to move on and takes the deal.
- A tenant is ready to move in and lease the home for $990/month, giving the investor a positive cash flow of $215/month.
- The owner retains the tax benefits and the insurance liability.
That's a simple example of the lease-to-own strategy for a rental property real estate investor.
