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Article by Jeff Beaubien

How you can accumulate equity faster than with a mortgage

You simply will not find a faster way to accumulate equity in a home than with the lease purchase contract. The three examples below prove what I say. Study them and decide for yourself.

Example 1

A comparison of the rate of equity accumulation in a one-year period between renting, owning, and lease purchasing based on the following example:

You find a 3-bedroom, 2-bath home in a nice part of town. The sales price is $100,000. You convince the landlord/seller to lease purchase it to you. You put down $3,500 (3.5%) as an option deposit which is credited 100% towards the purchase of the home when you buy it plus first month's rent which is $1,000. Each month you receive a $250 (25%) rent credit towards the purchase of the home.

Assume that if the landlord/seller was only interested in renting it, the fair market rent is $1,000 per month and that he would want first and last month's rent plus a security deposit of $1,000 as a down payment.

Assume also that the mortgage company's interest rates are at 8% and the smallest down payment they offer is 5% of the sales price. Taxes, insurance and private mortgage insurance (PMI) are $303 per month. Closing costs and prepaids typically cost about $3,000 for a $100,000 home.

  Rent Own Lease
Purchase
Monthly Payment $1,000 $1,000 $1,000
Down Payment $3,000 $8,000 $4,500
1st Year Cash Paid $13,000 $20,000 $15,500
1st Year Equity Earned $0 $791 $3,000

Example 2

Find the rent figure below that most closely resembles your monthly rental payment to determine how much money you are throwing away each year in rent.

Rent 1st Year 2nd Year 3rd Year
$600 $7,200 $14,400 $21,600
$700 $8,400 $16,800 $25,200
$800 $9,600 $19,200 $28,800
$900 $10,800 $21,600 $32,400
$1,000 $12,000 $24,000 $36,000
$1,100 $13,200 $26,400 $39,600
$1,200 $14,400 $28,800 $43,200
$1,400 $16,800 $33,600 $50,400
$1,600 $19,200 $38,400 $57,600
$1,800 $21,600 $43,200 $64,800
$2,000 $24,000 $48,000 $72,000

Example 3

A side-by-side comparison of the rate of equity accumulation between a mortgage and a lease purchase contract. Both have the exact same monthly principal and interest payment of $900.

  Mortgage*   Lease
Purchase**
 
Month # Principal Interest Principal Interest
1 $82.29 $817.67 $250.00 $650.00
2 $82.84 $817.12 $250.00 $650.00
3 $83.39 $816.57 $250.00 $650.00
4 $83.95 $816.01 $250.00 $650.00
5 $84.51 $815.45 $250.00 $650.00
6 $85.07 $814.89 $250.00 $650.00
7 $85.64 $814.32 $250.00 $650.00
8 $86.21 $813.75 $250.00 $650.00
9 $86.79 $813.17 $250.00 $650.00
10 $87.36 $812.60 $250.00 $650.00
11 $87.95 $812.01 $250.00 $650.00
12 $88.53 $811.43 $250.00 $650.00
13 $89.12 $810.84 $250.00 $650.00
14 $89.72 $810.24 $250.00 $650.00
15 $90.32 $809.64 $250.00 $650.00
16 $90.92 $809.04 $250.00 $650.00
17 $91.52 $808.44 $250.00 $650.00
18 $92.13 $807.83 $250.00 $650.00
19 $92.75 $807.21 $250.00 $650.00
20 $93.37 $806.59 $250.00 $650.00
21 $93.99 $805.97 $250.00 $650.00
22 $94.62 $805.34 $250.00 $650.00
23 $95.25 $804.71 $250.00 $650.00
24 $95.88 $804.08 $250.00 $650.00
Total $2,134 $19,465 $6,000 $15,600

* Mortgage: Loan amount of $122,650. Amortized over 30 years at 8% interest. Does not include taxes, insurance, PMI, association dues or special assessments which will raise your monthly payment. You will have to wait 169 months (14 years) before principal will begin to accumulate at a rate of $250 per month!

** Lease Purchase: Sales price of $122,650 (hypothetical). Option matures in 2 years. You do not have to pay taxes, insurance, PMI, association dues or special assessments.
Jeff Beaubien, www.Lease2Purchase.com is the President and founder of Beaubien Investment Company in Howell, Michigan. He specializes in creative real estate techniques, but focuses on the most powerful technique of them all; the lease purchase contract.
As a result of his success in real estate, Mr. Beaubien is the author of his real estate course, The Lease Purchase Handbook.
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