Two weeks ago I mentioned that one of the easiest (and free) ways to get a lease option deal is by calling “for rent” ads in your local newspaper. This week I’m going to share with you how I personally structure my lease option deals to make sure I get paid.
First off, remember that the beauty of the lease option is there are three different ways to make money. You can make money from the “option money” a tenant/buyer pays you when they move into the place. You can make money from the cash flow on the rent amount (I’ll explain this in a minute). And of course, the big payday is when you sell the house to the tenant/buyer.
Let’s begin with the big payday when you sell to a tenant/buyer. When I’m deciding to do a lease option deal I want to make sure there is at least a $30,000 spread on the back end for me. What this means is that if I get a house under option for $150,000, I want to be able to sell it to my tenant/buyer for a bare minimum of $180,000. These days I always try and get a $50,000 spread, but the lowest I’ll go is $30,000.
Of course, these days you have to remember…
That the back end money is “bonus” money. When the market was hot several years ago, tenants were always exercising their options and it was easy to sell a house to a tenant/buyer. But now, it’s a lot tougher to get a tenant/buyer qualified and options are being exercised less frequently.
Now let’s get to the cash flow of the property. I like to make $200 a month cash flow when I do a lease option deal. If my deal with the landlord requires me to pay $1,000 a month in rent, then I want to be able to rent out the property to the tenant/buyer for no less than $1,200 a month rent. In fact, one of the best ways to ensure you get this $200 a month spread is to tell the landlord that it’s company policy you make $200 a month or else your company can’t do the deal.
Also, something important that I do, and recommend you do too…
Is that I always pay the landlord’s mortgage for him. I never send him a check, because I want to make sure the mortgage is getting paid on the property and he’s not just pocketing my money. For instance, on one deal I did the landlord’s payment was only about $600 a month, but my agreement stated I would pay him $800 a month. (I rented the house for $1,000 a month.) For this particular property I mailed the mortgage for $600 every month and then mailed the landlord a check for $200. (Set up your auto pay to make this easy.)
The final way you can get paid is from option money when a tenant/buyer moves into the house. When the market was booming you could get several thousand dollars. But now it’s usually about $5,000. I try not to get any less than that, but there have been times when a seller could only put down $4,000 or so and I had them make up the difference by sending me an extra $100 a month until the option money became $5,000.
Don’t forget, you can structure your lease option deals a million different ways, but the reason I do things this way is because not only does it make me a good amount of money, but I also have a cash cushion built in, just in case I made a mistake and calculated the numbers slightly off.