BiggerPockets

Ok, this is my first post, but, I've been investing for around four years, have 8 single family homes and two three unit buildings, one with 13 rented garages. I'm currently at the point where I have to get commercial lending and I can get 15 years, (one company says 20 years, but haven't used them yet) and on this particular property, I'm getting 5.25% this year with reviews every year. I purchased the house with my HELOC and rehabbed it and now will refinance at those terms so that I recoup 100% of my invested money, thus I have no money into the property at this point. LTV will be less than 75%

My tenant wants to buy the property. I've run the numbers and in basic summary, if I lease option for two years, I will end up with roughly 34k in cash before taxes. Now, I can probably use that money on down payments for three additional houses. The houses we buy are in the 35 to 40k range but value around 55 to 60k after rehab.

If I hold and rent at current rent of 530, with modest appreciation of 3% per year ( i know this is not guaranteed ), in fifteen years I will have equity of roughly 85k with around 5000 per year of positive cash flow.

So, what would you do? Lease option and then use the money to buy three more houses to hold and rent....it is tough to get houses at a good IRR if I have to put in 25%. Or, hold and rent this one house?

Thanks.

Joel

Mike,

Thanks for the reply...yeah, I've heard the statistics on lease options, but, I guess if the eventual sale would somehow be guaranteed, my leanings are toward fulfilling the sale and using the proceeds in a 1031 to move into two or three new properties, which would hopefully give me three properties with 80k equity outright in fifteen years...what do you think?

Originally posted by J D

I guess if the eventual sale would somehow be guaranteed

What Mike said, as you are suggesting a lease "option", not a lease "guarantee". A theoretically stronger position to theoretically guarantee the sale later on would be a land contract as that (at least where I'm at) is more of an owner financing proposition - so theoretically they buyer is more "locked in" to the property.

On the flip side. As I understand it (I'm no attorney), the problem with a land contract vs. a lease option is that a nonperforming buyer's attorney has a better chance of arguing equitable interest in the property in the event that the intended buyer actually does not buy it. Plus to get someone out of a land contract in some areas, it requires an actual foreclosure rather than an eviction. I don't do them given the knee jerk reactions of some local politicians to place moratoriums on foreclosures. Plus, an eviction is so much cleaner and cheaper.

You have to be ready for the nonperformance of lease option buyers as they are credit risks. If they weren't, they could get traditional financing.

Tim

I like to lease-option simply because the tenants take better care of the property. If they buy, I have extra cash to re-invest, if not, I have good cash flow.