Should I choose lease options when I have little money?

6 Replies

I am 31 years old and would like to invest in rental properties with my husband. We don't have a reserve right now but also don't want to let that stop us from investing. We want to invest and get involved in real estate properties in order to have the financial freedom we have been craving. I am a stay at home mom so we only live on his income. We believe renting properties is for us, but want to be wise about our financing. Is the lease option process a good start for a family like ours? We already own our own home and would like to rent it out. The backyard isn't very nice so it needs about 1000 dollars worth of work. Any advice?

Hi Anna, welcome to the world of real estate investing. It's such a coincidence because i have family living in Mesa Az, and have looked there for RE investments. 

Your question is tough to answer because lease option terms vary considerably. But as a general rule I would strongly recommend building up a reserve fund or at least opening lines of credit that would provide emergency funding if you so need it for the type and amount of investing you plan on doing. 

From what I've learnt talking to people, investors (real estate or otherwise) who lose their shirt tend to be the ones who are over leveraged, and have no holding power due to a lack of reserve funds. 

In fact, I find having reserve funds as a landlord to be super super important especially if you still have a loan attached to that property. I tend to be conservative and hold about 6 months rent in reserve funds even for a fully paid up property. There are tons of things that could pop up that requires reserves as a landlord including but not limited to (and the worst part is that they could sometimes pop up all together at the same time)

1. mechanical/structural failure in your rental home 

2. legal fees to cover a long and difficult eviction

3. costs to rehab after a turnover

4. Special assessments or HOA or city related ordinances

Also, if you did the math, and based on my personal observation, land lording as a means to financial freedom is very long and tedious unless you have some other form of income to break the cap rate on the property, or have some really innovative way to acquire property (but this often in itself needs some level of capital).

If you have very little capital, I would save the money (i am generally risk averse), and use sweat equity, like being a realtor or wholesaler to build the funds to invest, then combine your knowledge with things like options trading is where it all comes together and makes sense. 

Of course, this is all my personal opinion. There are guys that have land lorded their way to freedom, but I do notice they often have realtors license or a side business as well. 

Anna, since you want to get into lease options you can always assign the first few to build up some capital. The nice thing about doing it that way is that you're going through all the motions of the type of investing you want to do. Namely, finding a motivated seller, negotiating a deal, and then locating a suitable tenant/buyer. The only difference is that you are stepping out of the deal instead of staying in the middle (you give up a chunk of the profit, but you have no ongoing liability).

@Brian Gibbons talks a lot about assignments here at BP.

@John Jackson  wow they let you out of prison already? Congrats!

Reports of my death have been greatly exaggerated. It was all an auto-correct misunderstanding. It was supposed to say "Doug got married" but came out as "Doug got murdered" ... funny thing :P

@Doug Pretorius HAHAHA!!!! THAT'S RIGHT!!! I forgot you married that wonderfully beautiful young lady...I guess you are the only male in your village up there...

@Anna Smith to get back on track..yes..lease options are a great and easy way to get involved in RE.

And never move to Canada...

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