I see a lot of folks scaling with rental properties in the buy and hold market. I am looking at doing the same things only with Lease Options. I have a separate lease and option, both 3 years. Set purchase price initially. My experience is it sometimes takes several tenants before someone actually buys the home outright and I've moved that money into a 1031 to continue scaling. Good plan? Bad plan? Anyone else doing something like this? Thanks all in advance!
Are you planning to do sandwich L/O or purchase then sell via L/O?
Just planning to follow an acquisition plan to scale out but use the lease and option. No Sandwiches. Assessment is buy "rent ready" properties, rent them out and sell an option to purchase agreement for several thousand. Have done this before, just not sure if it's a better plan that straight buy and hold. Like the opportunity to strike for big money for 1031 exchange and roll it forward vs. just continual cash flow. Not sure if that makes total sense, but essentially scale out to 10-20 doors via lease/options instead of straight rentals.
FWIW my 10 cents re LO/WLO; There are great coaches/teachers on youtube of lease option and wholesale lease options:
Joe McCall, Joe Bodeck, Joe Crump, John Jackson, all are great actually. I've spent a few years buying all of these guys stuff and chopping up with a genzu knife. They are all good and modestly priced IMHO.
- I have done sandwitch lease options and will never do another buy on a lease option (LO) again. I will buy cash, subject to, financed, seller financed and sell on a LO but never again buy on a LO. Too much risk. Today I'm only buying subject to. I closed one 8 weeks ago, will close another in a few weeks. Buying on a LO has risk because:
- the seller can stop paying the mortgage
- The market can drop and you wont be able to get the buyer on a LO to finance and cover the option price you have wth the seller (it happend).
- Unless you file a memorandum the seller can sell to someone else.
I'll never buy on a LO again into a sandwitch (multi years). I plan on buying subject to and sellng on LO (rent to own) and either bank or seller (me) financing on a wrap.
I strongly suggest everyone super educate yourselves from the above list in parallel with your marketing for sellers (the challenge today).
How do you find sellers who will via negotiate rent to you while you get financing,,,, then you convert that "yes" into selling via leaving the mortgage in place (subject to):
- Listed and long days on market
- expired listings
- For sale by owner in zillow (look for the click filter for FSBO) and craigslist. Call them all for a few months; "would you rent to me while I get bank financing in 9-18 mo?" when you get a yes you slowly convert into a sale and leaving the financing in place.
- Direct marketing to low equity, has a lien or bankruptcy. I use propstream.com to find these.
- Buy hard to find leads from private list brokers for: 30-60-90-120 days late on payments (financially stressed).. This list is where 2 of my last leads came from.
Best to all.
Thanks everyone for the input. Let me ask this another way-anyone see something wrong with purchasing rentals but renting/selling options on them as a matter of course. Typically set the rent, give them a 3 year lease with rent increasing by $50 each year & a 3 year option to purchase with a 12% boost from the current Zillow or MLS comps. Do this knowing some will get bought out, others will turn over...why not use the 1031 when the properties do turn over, save the taxes and then go purchase another property? That's what my plan is-how is that better/worse than just Buy & Hold/rent the properties? Thanks all. This discussion is very helpful.
@Lance Marshall , It's a great model. You're separating the lease and the option. That's good. You're right it can take several tenants before one sticks. But meanwhile you're enjoying the option money from each. I used to target mid level executives and would actually let them pick out their house. I would buy it, give them the escalating lease just like you and the option. My one difference was that I would escalate the strike price annually so each year they kept it would add to the purchase price. That made it follow a more normal appreciation curve and they were motivated to purchase during the 1-2 year mark so I could go on with the next one.
Perfect 1031 opportunity for you.
@Lance Marshall The reason that I believe the lease option model is better than the simple buy and hold model is because of several reason. Here are some:
- tenants take care of the property more than a renter would
- tenant/buyer pays an option fee upfront that is just profit or goes towards the decrees of money left into the property
- you can lock in a purchase price higher than the current market value
- you can have the option contract written to where the tenant/buyer buys the property "as is" and pays all closing costs. That adds to the profit
- you don't have to spend money to get the property ready to sell when you sell it
- if you hold on to a rental long enough, you need to put money in to it to sell it
- the ROE (return on equity) goes down over time and it would be more profitable to take profits and trade up if you can continue to buy properties under market value rather than keep the money in the same property for too long. Of course you need to be able to have some sort of deal flow for you to be able to do this.