Mortgages & Creative Financing

How I Structure My Lease Option Deals

193 Articles Written

Two weeks ago I mentioned that one of the easiest (and free) ways to get a lease option deal is by calling “for rent” ads in your local newspaper. This week I’m going to share with you how I personally structure my lease option deals to make sure I get paid.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

First off, remember that the beauty of the lease option is there are three different ways to make money. You can make money from the “option money” a tenant/buyer pays you when they move into the place. You can make money from the cash flow on the rent amount (I’ll explain this in a minute). And of course, the big payday is when you sell the house to the tenant/buyer.

Let’s begin with the big payday when you sell to a tenant/buyer. When I’m deciding to do a lease option deal I want to make sure there is at least a $30,000 spread on the back end for me. What this means is that if I get a house under option for $150,000, I want to be able to sell it to my tenant/buyer for a bare minimum of $180,000. These days I always try and get a $50,000 spread, but the lowest I’ll go is $30,000.

Of course, these days you have to remember…

That the back end money is “bonus” money. When the market was hot several years ago, tenants were always exercising their options and it was easy to sell a house to a tenant/buyer. But now, it’s a lot tougher to get a tenant/buyer qualified and options are being exercised less frequently.

Now let’s get to the cash flow of the property. I like to make $200 a month cash flow when I do a lease option deal. If my deal with the landlord requires me to pay $1,000 a month in rent, then I want to be able to rent out the property to the tenant/buyer for no less than $1,200 a month rent. In fact, one of the best ways to ensure you get this $200 a month spread is to tell the landlord that it’s company policy you make $200 a month or else your company can’t do the deal.

Also, something important that I do, and recommend you do too…

Is that I always pay the landlord’s mortgage for him. I never send him a check, because I want to make sure the mortgage is getting paid on the property and he’s not just pocketing my money. For instance, on one deal I did the landlord’s payment was only about $600 a month, but my agreement stated I would pay him $800 a month. (I rented the house for $1,000 a month.) For this particular property I mailed the mortgage for $600 every month and then mailed the landlord a check for $200. (Set up your auto pay to make this easy.)

The final way you can get paid is from option money when a tenant/buyer moves into the house. When the market was booming you could get several thousand dollars. But now it’s usually about $5,000. I try not to get any less than that, but there have been times when a seller could only put down $4,000 or so and I had them make up the difference by sending me an extra $100 a month until the option money became $5,000.

Don’t forget, you can structure your lease option deals a million different ways, but the reason I do things this way is because not only does it make me a good amount of money, but I also have a cash cushion built in, just in case I made a mistake and calculated the numbers slightly off.

    J Scott
    Replied almost 9 years ago
    Jason – Great articles! A couple questions: 1. So, do you tell the seller/landlord that you are an investor and will be “subletting” the lease-option (not sure what the correct term is) to a buyer of yours? What percentage of sellers/leads will generally be okay with this type of transaction (assuming they are okay with the LO in the first place)? 2. How do you generally structure the option with the seller and your buyer? How long of an option time frame? How much option money do you pay to the seller (in option fee) and how much do you collect from the buyer? Etc… 3. Will you sign the lease-option with the seller before you have a buyer? Or do you like to have a buyer lined up first? 4. What happens if the buyer forfeits his option? Do you generally renew the option with the seller or just let it expire? Will you ever purchase the property and then flip it in these cases? Thanks for the info!
    Kenny Lewis Real Estate Agent from Roseville, California
    Replied almost 4 years ago
    Have you heard a response about these questions, J Scott? I would like to know the answers as well. (i know its been a long time since this post but still wondering)
    Replied almost 9 years ago
    Your article is very informative and helpful…..I will use your ideas in future deals. My question is this: Who pays for the home insurance during the lease option period? I appreciate your input. ddw
    Replied almost 9 years ago
    Radio silence? Both of those questions above are excellent.
    Replied almost 9 years ago
    Radio silence? Both of those questions above are excellent.
    Replied almost 9 years ago
    Radio silence? Both of those questions above are excellent. Reply Report comment
    Replied almost 9 years ago
    Radio silence? Both of those questions above are excellent. Reply Report comment
    Paul Gupta Investor from Fremont, CA
    Replied over 3 years ago
    I did some of these in the past. My opinions: 1. In my case I was not subbing as the original article suggests. So those issues didn’t apply. 2. Taxes and insurance – my responsibility since I still own title until sale happens. 3. Sale with seller financing is cleanest – but it has tax implications (and buyer may not have the required down) 4. How long – I’m looking for advice on this myself. Anyone w/ opinion. 5. How likely is it that the time window comes and goes, and the other party does not qualify. It seems they will get pretty emotional about losing their accrued monthly contributions, which might create volatility / hostility / risk… 6. Current price or forward price? The ones I did in the past had a current price, but in a rising market, and esp w long durations, forward appraisal works best. But what if appraiser comes back with a low number since tenants have let it go. i.e. They could ensure it presents badly to maximize their interests.
    Phuong Dinh from Lincoln, Nebraska
    Replied almost 2 years ago
    Thank you
    Mike Justice Rental Property Investor from Location Kentucky and USA
    Replied 6 months ago
    Knowing the note structure business is important in real estate investing