All Forum Posts by: Toby Hanson

Quote from @Don Konipol:

Quote from @Toby Hanson:

Are your rental properties struggling to generate positive cash flow due to the rising cost of homes and stagnant rental rates? You’re not alone. I’m going to introduce you to a game-changing strategy that can help you double your rental income and create a win-win-win situation for both you and your tenants.

Understanding the Challenge

In today’s real estate market, prices of homes have surged, but rental rates haven’t kept pace. Additionally, many people are dealing with increased mortgage rates, making it challenging to achieve positive cash flow from rental properties. If you’re facing these issues, it’s essential to find a solution that can boost your rental income and keep your real estate investments profitable.

The Secret: Hybrid Real Estate A.K.A. Lease Options

The key to overcoming these challenges lies in understanding and implementing lease options or rent-to-own strategies. These strategies are a specific form of seller financing that enables you to buy and sell real estate without the need for realtors or traditional banks. By offering lease options to potential tenants, you can double your rental income and create a more profitable real estate portfolio.

The Benefits of Lease Options

Here are some key takeaways on why lease options can be a game-changer for real estate investors:

Win-Win-Win: Lease options create a win-win-win scenario. You win as an investor, your tenants win by having the opportunity to become homeowners, and the community wins by increasing homeownership rates and stability.

Three Profit Centers: Lease options offer three major profit centers:

1. Upfront Down Payment: Tenants pay an upfront option fee that can range from a few thousand to tens of thousands of dollars.
2. Monthly Positive Cash Flow: Monthly rent payments in lease options can be significantly higher than traditional rentals, resulting in increased monthly cash flow. Tenants are also responsible for maintenance and repairs under $500.
3. Potential Profit on Sale: When the tenant eventually purchases the property, you can make substantial profits. There are no realtor fees, and the selling price can be higher than the property’s initial value.

Low Risk, High Reward: Lease options are low-risk investments compared to traditional rentals. You don’t have to deal with property management, and repairs are typically the responsibility of the tenant. This reduces your expenses and increases your potential for profitability.

Real-World Example

Let’s break down a real-world example to see how lease options can significantly increase your rental income compared to traditional renting:

• Scenario: You own a property worth $450,000 with a monthly mortgage payment of $2,500.
• Traditional Rental: You rent it for $3,100 a month, resulting in a meager $200 monthly positive cash flow after accounting for property management fees, maintenance, and repairs.
• Lease Option: You rent it for $3,200 a month, and enjoy a substantial $500 monthly positive cash flow because you do not have to pay for property management or minor maintenance and repairs.

The bottom line? Lease options can potentially double your rental income or more, providing you with immediate positive cash flow, saving on expenses, and increasing your overall profitability.

This post should come with a warning label.  The SAFE Act and the CFPB have have brought the “lease option” under their domain authority.  As a result the possibility of lawsuits is very high if the entire contract is not set up to precise standards. 

Good point, Don. Many unscrupulous landlords and even real estate 'gurus' have given lease options a bad rep because they were putting people into these agreements knowing they had little chance of exercising their option. We use a third-party MLO to prequalify our buyers and do not use rent credits. We also use a lease with a separate option agreement. Our goal is for our clients to become homeowners and we have a 100% success rate thus far. 

 Thanks, John. Have you done lease options yourself?

Are your rental properties struggling to generate positive cash flow due to the rising cost of homes and stagnant rental rates? You’re not alone. I’m going to introduce you to a game-changing strategy that can help you double your rental income and create a win-win-win situation for both you and your tenants.

Understanding the Challenge

In today’s real estate market, prices of homes have surged, but rental rates haven’t kept pace. Additionally, many people are dealing with increased mortgage rates, making it challenging to achieve positive cash flow from rental properties. If you’re facing these issues, it’s essential to find a solution that can boost your rental income and keep your real estate investments profitable.

The Secret: Hybrid Real Estate A.K.A. Lease Options

The key to overcoming these challenges lies in understanding and implementing lease options or rent-to-own strategies. These strategies are a specific form of seller financing that enables you to buy and sell real estate without the need for realtors or traditional banks. By offering lease options to potential tenants, you can double your rental income and create a more profitable real estate portfolio.

The Benefits of Lease Options

Here are some key takeaways on why lease options can be a game-changer for real estate investors:

Win-Win-Win: Lease options create a win-win-win scenario. You win as an investor, your tenants win by having the opportunity to become homeowners, and the community wins by increasing homeownership rates and stability.

Three Profit Centers: Lease options offer three major profit centers:

1. Upfront Down Payment: Tenants pay an upfront option fee that can range from a few thousand to tens of thousands of dollars.
2. Monthly Positive Cash Flow: Monthly rent payments in lease options can be significantly higher than traditional rentals, resulting in increased monthly cash flow. Tenants are also responsible for maintenance and repairs under $500.
3. Potential Profit on Sale: When the tenant eventually purchases the property, you can make substantial profits. There are no realtor fees, and the selling price can be higher than the property’s initial value.

Low Risk, High Reward: Lease options are low-risk investments compared to traditional rentals. You don’t have to deal with property management, and repairs are typically the responsibility of the tenant. This reduces your expenses and increases your potential for profitability.

Real-World Example

Let’s break down a real-world example to see how lease options can significantly increase your rental income compared to traditional renting:

• Scenario: You own a property worth $450,000 with a monthly mortgage payment of $2,500.
• Traditional Rental: You rent it for $3,100 a month, resulting in a meager $200 monthly positive cash flow after accounting for property management fees, maintenance, and repairs.
• Lease Option: You rent it for $3,200 a month, and enjoy a substantial $500 monthly positive cash flow because you do not have to pay for property management or minor maintenance and repairs.

The bottom line? Lease options can potentially double your rental income or more, providing you with immediate positive cash flow, saving on expenses, and increasing your overall profitability.

If you'd like to defer 100% of the capital gains tax in perpetuity you can do that with a complex spendthrift trust. They are expensive to set up but completely worth it in the long run. I know of a few firms that set them up.

Single-family rentals are typically the best for beginners. Buy and hold real estate is a great way for investors to diversify their investment portfolios and achieve financial freedom over time.

While income from a rental is considered passive, rental property is far from being hands-off. Landlord responsibilities include:

• Finding a property
• Advertising vacancies and showing the property
• Screening tenants
• Collecting deposits and executing leases
• Tenant communication
• Coordinating maintenance and repairs
• Collecting rent
• Filing evictions, if necessary

One rental property may not require a substantial amount of work, but multiple rental units will. There will be ongoing maintenance and repairs that need to be addressed. Some landlords choose to outsource managing their property to a property management service.

The biggest risk is the tenant. The last thing you want is to evict someone that stops paying and ends up trashing your house. You'll want to screen them well upfront by checking their credit and doing a background check. This can be outsourced as well.

Good luck!

Looking forward to it!

I had a similar question when I started with real estate. I wanted something passive but didn't want to deal with tenant issues. I've also heard the horror stories with Turnkey companies. 

The solution my business partner and I came up with was a sort of reverse lease option. The way it works is you first find a tenant who wants to buy a home but doesn't currently qualify for a mortgage. They need to have good income and at least 5-10% for the option fee. 

This way you know they have significant "skin in the game" and will have an owner's mindset vs someone just renting who may or may not take care of the property. 

The best way we've found to find these buyers is by networking with mortgage brokers and real estate agents. Usually, the buyer is self-employed and has claimed too much in tax deductions so the bank won't give them a loan. 

Once you've found someone you let them pick out the home they want to buy and have them sign the lease and option to buy agreements then collect the non-refundable option fee. We do credit 100% of the option fee towards the purchase of the house once they get their own loan 1 to 2 years down the road. 

We also have a mortgage broker pre-screen the tenant/buyer and give us an idea of how long they will need to qualify for a mortgage. We want to make sure whatever is holding them back from being able the qualify is fixable within a few years. 

This method virtually eliminates any risk of having a nightmare tenant and you still have all the benefits of long-term real estate investing. Appreciation, mortgage paydown, cash flow, tax write-offs, etc. You also avoid short-term capital gains by keeping the property one year and a day. (at least that's what my CPA says). 

After you sell you can take your increased capital and repeat the process. Sometimes the tenant won't end up purchasing but will want to continue to rent the home they picked out. You now have a long-term renter that takes care of the property. In our lease agreement, the tenant is responsible for almost all of the maintenance and repairs, so we don't need any sort of property management.

From time to time we will get a tenant/buyer with a good income and a sizeable option fee referred to us but we can't buy everyone a home so we have to refer them to someone who has cash or can still get a bank loan.