Advantages and Disadvantages for Lease Option Real Estate Investing

One creative way to get started investing in real estate is to use a lease option. The biggest advantage of using lease options to invest in real estate is –control.

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A real estate lease option contract is a combination of two documents.

The lease part of the contract is where the owner agrees to allow you to lease their property, while you pay them rent for a stated period of time. during the lease period, the owner can’t raise the rent, rent it to anyone else, or sell the property to anyone else.

The option part of the contract represents the correct you purchased to buy the property in the future, for a specific price. If you decide to exercise your choice to buy, the owner has to sell it to you at the negotiated price. the option part of the contract obligates the seller to sell to you during the option period — but it does not obligate you to buy. you’re only obligated to make rental payments as agreed during the lease period.

When the lease option contract is written and structured properly, it can provide tremendous benefits and advantages to the investor. If the lease option includes the “right to sub-lease”, the investor can generate a positive income by renting the property to a tenant for the duration of his lease, or lease option the property to a tenant-buyer for positive income and future profits. If the lease option includes a “right of assignment” the investor might assign the contract to another buyer for a quick profit.

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Lease option real estate investing, is a flexible, low risk, highly leveraged method of investing that can be implemented with little to no money.

High Leverage

It is highly leveraged because you’re ready to gain control of a property and profit from it now–even though you don’t own it yet. the fact that you don’t own it, also limits your personal liability and personal responsibility. Only if you decide to purchase the property by exercising your “option to buy”, would you take title to the property.

Little to no money

The real estate investor’s cost to implement a lease option contract with the owner needs little to no money out of pocket, because it’s entirely negotiable between investor and owner. Also, there are a variety of ways the option fee can be structured. It can be structured on an installment plan, balloon payment or other agreeable arrangement between both parties. the option fee can even be as little as RM1.00.

In order to secure the property for purchase at a later date, tenant-buyers typically pay a non-refundable option fee of approximately 2%-5% of the negotiated future purchase price to the vendor. Depending on how the lease possibility agreement is written and structured, the investor could possibly use the tenant-buyer’s option fee money to pay any option fee owed to the owner.

Flexible

Lease option real estate investing is a flexible method of investment because the terms of the agreement, like payment amounts, payment dates, installments, interest rate, interest only payment, balloon payments, purchase price and other terms are all negotiated between seller and buyer. Responsibilities of each parties are also negotiable. for example, if the investor does not need to act in the capacity of a landlord, he may specify in the lease option agreement that tenant-buyer will be responsible for all minor maintenance and repairs and the original seller can remain responsible for any major repairs.

Financially Low Risk

It is low risk financially, because if the property fails to go up enough in value to make a profit, you have the purchased the right to change your mind and let the “option to buy” expire. Even if your tenant-buyer decides not to buy the property, you have profited by a positive monthly cash flow from the tenant-buyer’s rent payments, and upfront non-refundable option fee.

Source: ezinearticles

This method of investing, basically gives the investor the right to possess — be in control of — and profit from a property without owning it.

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