Lease Option investing

13 Replies | San Diego, California

Hi All,

Does any one in the San Diego market have experience or advice about Lease Options? Finding a motivated seller and matching them with a short term lessee (tenant-buyer) to take over the property.

I'm new to real estate and have 0 capital to make any kind of down payment for a rental property. While researching i have found that my best options to get started (while saving money to eventually have a down payment) might be pursuing lease options (Sandwich lease options) or even investing in other markets via Turnkey investing that requires much less money upfront than the San Diego market.

I'm looking to connect with investors in San Diego to learn from and would appreciate any advice!

Thanks!

There are few lease options in San Diego because the property appreciation makes it historically a bad option for the owner. So finding a lease option may be harder than finding solid wholesale options (which also is not easy to find properties that can be purchased at 70% of ARV).

Good luck

Thanks @Dan Heuschele . That makes sense about the lease options. I will continue to research them because i also feel like there are many people including myself who live in San Diego and are not able to afford the conventional way of purchasing a home. What would you say is the best recommendation for some one in this market to get started with little capital?

Thanks! 

If you are finding motivated sellers, then you can structure lease option contracts with them. Typically most beginners start with Wholesaling because it is the fastest way to make money and requires little to no capital. If your sellers are unable to accept a low cash price, do ask them if they are open to terms. If they are, you can structure a lease option agreement with them or a seller financing agreement and you can wholesale that contract for a fee if you like. 

Originally posted by @Bryan Field :

Thanks @Dan Heuschele. That makes sense about the lease options. I will continue to research them because i also feel like there are many people including myself who live in San Diego and are not able to afford the conventional way of purchasing a home. What would you say is the best recommendation for some one in this market to get started with little capital?

Thanks! 

My view is house hacking with a FHA/VA is the best option for those with limited finances. FHA/VA with a high LTV loan may provide difficult initial cash flow but gets you into a market that has historically produced outstanding ROI. With high owner occupied LTV loans, obtaining the funds can be obtained by side hustles or concerted savings. It will not be overnight and it could take sacrifice but it can be done. Most people start with little to no money.

For an example of a house hack scenario, my last purchase if at 96.5% LTV (3.5% down FHA loan) would have required $15,470 plus closing costs to purchase a detached duplex (3/1/1, 2/1/1) each with their own yard. Live in one unit and remodel it while renting the other unit. Then repeat on second unit. Then refinance while still owner occuppied hopefully getting virtually all of your purchase costs and rehab cost back in the refinance. Then find another property When you find that property rent the 2nd unit of the first property. Ideally the property has positive cash flow (both units are recently rehabbed and therefore should get top of market rent) and you have extracted virtually all of your investment money.

I have not house hacked in years and therefore do not get anything close to 96.5% LTV (mostly I purchased with 80% LTV) but the rest of the plan is what I still do. I look at the house hack option as providing some equalization between those young and starting out versus those with more experience and capital. Use the owner occupied advantage that house hacking presents.

My view is that ethical wholesaling requires funds to close in the event that you do not obtain a purchaser by the agreed to close date.  So it requires significant capital.  In addition, finding outstanding wholesale deals is challenging and there is a lot of competition.  Lease options are also very challenging to find in San Diego.   

Good luck

Originally posted by @Tushar Radke :

If you are finding motivated sellers, then you can structure lease option contracts with them. Typically most beginners start with Wholesaling because it is the fastest way to make money and requires little to no capital. If your sellers are unable to accept a low cash price, do ask them if they are open to terms. If they are, you can structure a lease option agreement with them or a seller financing agreement and you can wholesale that contract for a fee if you like. 

Why is wholesaling the best place to start? I would disagree on so many levels about this recycled myth, suggesting someone start by wholesaling (especially in Southern California) is a near certain instruction on how to waste several thousand dollars, their time and likely cause them to end their entry into real estate investing due to failure. 

There are so few deals that are possible to wholesale today in this market, the sellers they speak to. The majority will be best suited to list their home. A fraction would be good wholesale candidates. Getting your license and being able to list or wholesale a deal is the optimum method to build capital and succeed in real estate today. 

@Tim G. . Thanks for the comment. I am going to start on my License soon as i feel like having it can bring value to a possible partnership in the future. Do you have any advise on private money lending to obtain a duplex for house hacking. then eventually getting a conventional loan to pay back the private money? is that a solid strategy for the San Diego market?

@Bryan Field my style is to go make the money I need to then go buy deals. The idea of borrowing a down payment makes me feel nervous and rushed. Most private lenders are going to want you to have some skin in the game, or they are on the hook 100% for your deal. The higher the risk the higher the interest rate. I'm not sure I see a duplex in San Diego earning enough monthly income to cover the note on a private loan. 

Many private loans are interest only and above 10% that would put you at a $4166 a month payment on a $500k duplex without considering taxes, insurance etc. That is scary math to me. If you could score a low interest long term private loan maybe its possible then. 

Are you opposed to working and earning the money for a down payment? My entry into real estate was funded by hustling an outside sales job and wholesaling (2012-2013) today if I needed to stack cash in a similar manner I would get my license and start hustling for listings. That to me is the fast track to getting capital for buying a home and having more access to better deals. 

@Tim G. im definitely not opposed to working and earning the money for a down payment. Ive calculated that at my current pace it would take about 2 years from now to save enough for an FHA 3.5 - 5% down to get a house hacking duplex. then i would do any value adding repairs over then next 1-2 years to refinance out of PMI and ideally rent out my live in unit to generate cash flow then repeat with a new duplex/triplex.

Getting my license, finding a mentor and co listing deals on the weekends may help speed up that process. Thank you!

Originally posted by @Bryan Field :

@Tim Gordon im definitely not opposed to working and earning the money for a down payment. Ive calculated that at my current pace it would take about 2 years from now to save enough for an FHA 3.5 - 5% down to get a house hacking duplex. then i would do any value adding repairs over then next 1-2 years to refinance out of PMI and ideally rent out my live in unit to generate cash flow then repeat with a new duplex/triplex.

Getting my license, finding a mentor and co listing deals on the weekends may help speed up that process. Thank you!

Thats the spirit, its all about accelerating the income/savings through a side hustle. Big Block Realty in San Diego has a good reputation with agents I know. I took the courses online for under $200 to get my license, I passed but never activated it. The other perk is you'll get to see a lot more deals come across your desk and if you buy a deal you get your commission back. 

My impression is that there are way too many realtors in Southern California. The traditional model of wholesaling where you lock up property all cash for a low ball offer doesn't work very well in Southern California too. But I suspect that lead conversion is far more possible with terms agreements. If a wholesaler knows how to negotiate terms, he can be very successful.

@Tushar Radke our sweet spot for lease options is having our all in be 140k or less into the property and having that be 75% of the ARV. When you have more than 140k into the deal it makes it more difficult to make the property cash flow without leaving money in the property when it gets refinanced.

@ Tim Gordon I just finished my first deal and have some a few months to kill (down time while I save up for my next downpayment). I want to get my license to have access to the MLS / bypass realtor fees - do you have a recommend on a course? Which course did you take for $200?

BTW SD surfer here as well. 

@Shiloh Lundahl , I saw your reply about all in at $140k or less and I was just about to comment about being in California when I saw you are in Burbank.  Burbank is about 15 minutes from me, so I am familar with prices in this market.  My question is when you say all in, are you talking about your up front costs and rehab costs?  My 2nd question is if you get a lease option, are you then doing a sublease and if so, are you putting in additional fix up money before you sublease to anyone?  Just trying to do the math on how that works with properties above $400,000.