First Post... Lease Option - Good Idea or Stay Away?

Question

Hey all - I'm a newbie about to close on my first rental property in a A-/B+ neighborhood. It'll require less than 5k to get rent-ready and should cash flow about $350/month. Rent will be around $1900 and trying to determine if I should offer a lease option/rent-to-own (if the potential tenant is interested). I wasn't originally thinking of buy-and-hold but have heard from a few sources this is a potential way to increase the ROI. Any insight would be appreciated!

Jonathan Klemm · Answer

@Trent Epley - Where is your property at in the South Suburbs?  I like those numbers haha.

I know a couple of people who use the rent to own strategy and love it.  Ironically though most of the renters never end up buying the houses.  I'd still vote you stick with buy and hold unless you are planning to use the rent/own strategy for all your properties.

You might see a little higher ROI on rent/own because the tenants will tend to take better care of the properties.  I've got a good rent to own contract happy to share it with you.  If you are interested shoot me a PM.

Ryan Xu · Answer

The lease option is one type of rent-to-own, the tenant has the option but not obligated to buy when expire. Rent-to-own also including another type of contract called lease purchase, that he/she has to buy it when it expires. Thus, option normally charge more than obligation. In a surely appreciate area, lease-purchase put the landlord at a disadvantage position, vise versa.

Michael Carbonare · Answer

@Trent Epley, I use the terms rent-to-own, lease option, and lease purchase interchangeably because they are all one and the same.  I know the pointy headed intellectuals will argue that a lease purchase obligates the tenant to purchase the property at within the agreed to time frame. But in the real world there isn't any way to guarantee a purchase will transpire.  Suppose the tenant loses his job?  Becomes ill?  Divorce?  An angry homeowner can pursue the tenant legally and might even win his case and obtain a judgment.  Then what?  The deal still doesn't close as planned and the homeowner has racked up a few grand in legal fees.

Ryan Xu · Answer

The short answer is yes you can consider. The key is to do the calculation for the profit margin.

Even though, IMO for a metro city like Chicago with a high population, the majority return is from using the leverage to increase the equity + appreciation. So the lease option is potentially more profitable than rent-to-own.

Trent Epley · Answer

We're in the Southwest Suburbs (Orland/Tinley area). It's my first rental so I didn't want any major rehabs, but I am putting in a dishwasher as part of getting "rent ready". Floors are laminate so there's always room in the future to put in hardwood but the house is clean and any updates would be more on the aesthetic side. At this point though, I just want to get a tenant in and start landlording and learning the ropes.

Sarita Scherpereel · Answer

Hi Trent, what burb is the property in? There are so many microeconomic environments in this city it makes a different on ROI and the buy and hold strategy. Forced appreciation is my favorite way to help investors make money with a buy and hold. For $5k to get the property rent ready, it seems like there is very little room for improvements. Or is there?

Trent Epley · Answer

@Ryan Xu Appreciate it! What’s the difference between lease option and rent to own. I realize I’m using them interchangeably and shouldn’t be.

First Post... Lease Option - Good Idea or Stay Away?

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