Real Estate Coaching on Various Profit Centers with Lease Options

When I coach real estate mentees, the number one question is always….are lease options profitable? As an investor, if you’re looking to do this as a business or as a passive investment for yourself and your family, it is definitely very profitable because there are at least three profit centers in a lease option. The first one is “option consideration.”

Most people call this a security deposit, but an option consideration is when a tenant puts down money, let’s say two times or three times the rent they would put down as a security deposit; they will put that down as an option consideration.

For example, the rent is $1,000. On a regular rental, they would put down the first month’s rent in a security deposit of $1,000 and move into the property. On a rent-to-own, that same tenant would put down two or three times that amount, which is $2,000 or $3,000 in an option consideration, as well as the first month’s rent.

That money is their option to purchase the house when they’re ready to purchase within the terms of the agreement. That is the first profit center, and sometimes, that option consideration could be considerable. It could be as much as 3-5% of the sales price, or of the projected sales price. You can actually collect $10-20 thousand up front, in cash, in option consideration because that is what the buyer is willing to do in order to rent the property and then have the right to purchase it later on, when they qualify.

The second profit center is the cash flow that you get from a property. When you collect rent, for example it could be $1,000, you may have a mortgage obligation to the lender or the seller, of $700. That is a $300 difference, each month, of positive cash flow that goes right into “hip national bank.” If you are collecting $1,000 in rent and the obligation each month is only $700, you are making $300 every month. That is the second profit center and if you accumulate enough of these profit centers you can replace your J-O-B and not have to go to your full time job.

The third profit center is when the tenant purchases the property. Let’s say it’s now a year and a half or two years later and the tenant is ready to purchase the property. They have been getting their ducks lined up in a row, and now they’re ready to purchase. They have lending qualification that they are approved to get a loan. Let’s say they are ready to buy the property.

Let’s say the house is worth maybe $150,000. You bought this property on a rent-to-own, with the seller, at a strike price of $120,000. Now that you’re ready to sell the property, the buyer purchased the property at $150,000, which was agreed upon when they rented out the property with the option to buy. They purchased it for $150,000, which was agreed upon in the beginning. You sold it for $120,000, which was your strike price or your agreed upon price that you would buy from the seller. That is a $30,000 difference and you made that in profit as a third profit center.

Is a lease option profitable; absolutely, there are three profit centers. If you add it up, each deal could average anywhere between $20,000-$50,000 plus. You didn’t have a lot of risk involved. You didn’t take out a loan. You didn’t have your name on a loan. You didn’t have to put up a lot of cash to get the loan, and your tenant buyer is paying the mortgage while you control it via a lease option. Lease options are very profitable if you know how to do it correctly.

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