Lease Option/Purchase Agreements

1 Reply

Hi Everyone!

My name is Nick and I am new to Bigger Pockets. I currently live in Denver, and I would love to get your thoughts on lease option/purchasing agreements. I recently became familiar with this term and my brain lit up as i discovered this as a fantastic opportunity to make my entry into real estate investing. I am 25 years old and currently searching within the Denver market. My roommate has begun his journey into real estate investing and now owns his second house in under 13 months.

I would love to pitch him the idea of setting up a lease purchasing agreement with the commitment of buying the place in 2-3 years. It seems to me like a win-win situation. I have researched through benefits and downsides and even with taken the cons into consideration, it seems to like a great deal. I would pay him higher than average rent in addition to a fee to have the right to purchase. We are both great friends and trust each other in entering into an LPA. We would love to do in such a way that it would improve his Debt-to-income ratio, which is a challenge for him at the moment, especially after having acquired this loan on the current $550k home in Denver. There is also a vacant room in the house that will likely be filled within the next month.

The main question is, for those who have been successful in entering into this type of agreement, how could we structure the agreement as such that it would improve his debt-to-income? My initial idea is that I would pay him, say 20-30% above my rent now which is $1,100, and have that 20-30% go toward my future down payment. I would then create my own lease for the 3rd roommate and hopefully have them pay me their portion of the rent which would be higher than what I agreed upon. Again, this is me brainstorming. I am open to any and all advice and feedback!

Thanks everyone!

@Nick Elder I think that the lease of the 3rd room would have to be between the owner and the tenant. Also, I don't know if the Rent premium (the extra 20-30% rent) would count against his debt to income ratio. Technically the lease option fee and the rent premium should be placed into escrow or a separate account and held there until you are able to exercise your option. At which point the money would be credited towards your downpayment.