Hello BP members,
We are looking for some advice on doing a lease option on a duplex. The seller is motivated (burned out landlord), just not sure yet how motivated. The asking price on the property is $54,000 (just reduced $5000), and both units are currently occupied with rents of $470 & 500 with good tenants. We are looking at putting 3 k down on a 3 year lease. How do we determine what to offer as a monthly lease payment? We would like to get it down as close to PITI as possible but what is acceptable or typical with an income property? I understand with single family homes the payment would be close to market rent or a bit more but is that the case with duplexes?
The conversation is about "cash or terms"
I find it interesting that many people never look at the existing financing because that's a pivotal part of a terms offer (arm or fixed, amount piti, govt backed or private, etc)
I basically tell the seller the following after I find out the existing financing
"Mr. seller there's two ways I can help you, first I can give you a cash offer if you want to quickly sell the property, and that offer is not going to be top dollar because I need to factor in the costs to sell, about 10% of value, plus some minimum profit"
"The other way I can help you is to give you a cash monthly payment for a period of time and then pay off your existing balance in about 36 months. The payment to you depends on total rents received minus expenses with some minimum positive cash flow"
"Either solution I can act fast usually within 10 to 15 business days"
@Steve Vaughan has some great negotiation language too
You might want to look more into a land contract with a three year term. With a lease you won't be building any equity, your payment will be higher, and you'll just be making the difference between the rents and your payments to the owner. You will presumably be doing all the repairs and maintenance so the numbers there are kind of thin.
For a land contract I would suggest plugging the purchase price and amortization period into a mortgage calculator online and then comparing that to your rents and expenses to see if the property makes sense to you. Then you could adjust the payment up or down depending on what you want your cash flow and balloon payment to be. Obviously it is most beneficial to you to make the lowest payment to the seller and vice versa on their side. So I think it will ultimately come down to who wants the deal done more.
I'm not sure you understand how a L/O works. The lease and the option are two separate agreements carried out simultaneously. Don't connect the two.
To figure out the lease payment you will be making, take your rental income as a starting point and subtract all the expenses you will be handling (paying), then the desired cash flow (if you don't make positive cash flow, why bother). The number you get is the maximum rent you will pay the seller. If the seller wants more, or needs more to cover their expenses, you have a bad deal.
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