Using Lease-to-Own Approach for Rental Property
Most people, and even brand new investors are familiar with the lease-to-own strategy, also called lease-purchase or rent-to-own. However, not that many people have been introduced to the sandwich lease-to-own approach to real estate investing. Let's look at an example situation to see how it works.
You're a real estate investor new at the game and cash poor. Or you're an investor who has maxed out their ability to get new financing, or maybe a bit of both.
You want to own more properties to lease them out for cash flow, but you can't see how to purchase them in your current situation. This is a shame, as there are a number of great bargains out there with owners in trouble with their mortgages.
You know about lease to own as it applies to you buying a property by doing a lease-purchase option with the owner. You pay them a non-refundable lease-option fee up front and sign a three-year lease with the option to buy the property at or before the end of the lease at a pre-negotiated price. You pay a monthly lease amount and work to improve your credit and gather a down payment for the exercise of your option and the eventual purchase of the home.
The part of the "sandwich" lease-option strategy you haven't been exposed to is the other slice of bread. There is nothing keeping you from going out and finding a tenant who wants to own a home like this one, but they have credit and/or cash problems that keep it from happening now.
You show them the home and they love it. They wish they could buy it, and you tell them that they can.
You tell them that you'll execute a three-year lease with a certain lease payment and that they can exercise their option to buy the home at the end of that lease at a certain price. You also tell them that they must purchase this lease-option with an up-front non-refundable deposit.
The situation is the mirror image of the way in which you gained control of the home. There are two leases, with you sandwiched in the middle. The beauty of this purchase and rental strategy is in finding the right home and negotiating deals on both sides with:
- A higher deposit from your tenant. - Example: you paid the owner a $2000 non-refundable lease option deposit, and your tenant pays you $3000.
- A higher lease payment from your tenant. - Remember that the owner needed to sell or lose their home. You can usually negotiate a lease payment that equals their mortgage payment, less than the going rate to lease a home like this.
- A higher purchase price from your tenant. - The owner really needed to sell and realized that a low price is better than a foreclosure. You negotiate a price significantly higher with your tenant-buyer.
You're making money three ways here. One example deal involved a $1000 profit up front on the lease-option payment, $500 more per month from the tenant than the investor is paying the owner, and a selling price $30,000 higher than the agreed-upon purchase price. That's a gross profit of $49,000 when the home is purchased/sold at the end of the three years. That's the sandwich lease-to-own strategy.
Do some research in your area for opportunities to make it work for you.