|The Benefits of Lease-Options
There are many benefits to using lease-options as a strategy to manage a portfolio of
investment property. As an investor, our emphasis is to improve portfolio performance by increasing
returns, reducing volatility, and lowering the overall risk.
The following characteristics make lease-options more favorable than conventional landlording:
- More Upfront Money
- Higher Rents
- Higher Sales Price
- Little or No Maintenance Costs
- Attracts Better Tenants
- Flexible Use
- Less Management Responsibilities
- Quick Tenant Removal When They Default
- Tax Benefits
- Alternative Financing
Most of these benefits come from the tenant mindset that they are “buying” a property where the
lease-option becomes a form of intermediate financing for them. With this short-term intermediate
financing, the goal is to obtain a refinance loan with another lender to ultimately own the property.
Because of the buyer's mindset, tenants are willing to pay more and do more for the opportunity to buy.
More Upfront Money
There is almost always greater upfront money received from lease-option tenants than is normally
collected with a standard rental. The tenants are willing to provide more upfront money because they
view the funds they are paying as similar to a down payment in a conventional purchase with a mortgage.
Because their intent is to ultimately own the property, they are willing to give extra upfront money
to secure the right to purchase the property.
Because few property investors are willing to sell and provide financing to the type of people
we deal with, they are willing to pay a higher monthly premium for the right to buy. As such, we are
able to collect higher rent payments than normally allowed through conventional rentals. It is not
uncommon to receive monthly payments that are 10%-20% higher than prevailing market rents.
Higher Sales Price
In addition to the willingness to pay higher rents, the tenants are willing to pay a higher
price for the property as well. The price is often secondary as long as they can afford the upfront
money and the monthly rent payments.
People in this socio-economic group are simply not as discriminating in the price they pay for
a property. Most are simply happy to have someone willing to sell a house to them and provide
intermediate financing to do so. This sense of gratitude makes them very receptive to
paying a higher price.
Little or No Maintenance Costs
When people buy houses, it is unsaid but understood that once someone buys a house, they have to
assume the repair and maintenance responsibilities for that house. Because all parties are clear in the
arrangement that the tenants are ultimately buying the property, it is expected they will take
responsibility for all repairs and maintenance since it will become their house. To real estate
investors, this point is one of the major benefits in using lease-options. Short of catastrophic
damage to the property, the investor can expect nearly no maintenance or repair costs compared to those
with standard rentals.
Attracts Better Tenants
The people who are attracted to lease-options are often those who have already rented for many
years. They have attempted to buy a house through conventional means, but for a variety of reasons,
they have been unable to do so.
Because they have rented for many years, our tenants are frustrated homebuyers looking for
someone to give them an opportunity to buy with easy financing. Because many have tried to qualify for
conventional mortgages, they are aware of the need for a down payment. As such, these people often have
a good tenant history, are employed, and have accumulated a decent amount of savings to put towards a
down payment. In our case, this is upfront money to be used for a lease-option arrangement.
Typically, in a conventional rental situation, the landlord is expected to provide housing
that includes functional appliances, functional environmental systems, reasonably good
flooring/carpeting, landscaping, and a good interior condition. Not only are landlords expected
to provide tenants this at the time of move-in, but the landlord is also expected to incur the cost of
ongoing maintenance and repairs! All this so that he can collect only a small security deposit and
first month’s rent!
When the tenants enter into a lease-option transaction, they understand that they are
"buying" into the property in "as is" condition. It does not mean that we, as
investors, don’t do some property preparation. However, it also doesn’t mean that it is necessary to
totally renovate a property before we can "sell" it. Often, you can "sell" the
property "as is" with all its imperfections.
Less Management Responsibilities
Once an investment property has been "sold" through a lease-option transaction,
there are almost no management responsibilities except to ensure that the Chapter 1 The Beauty of
Lease-Options monthly payment is received. The repair and maintenance responsibilities have been
placed with the tenant. As such, most of the well known "landlord headaches" have been
Quick Tenant Removal When They Default
The lease-option transaction, when structured correctly, often utilizes prevailing
Landlord-Tenant laws of eviction to resolve cases of non-payment. With alternative forms of financing,
the investor often has to resort to a foreclosure process, which can be both time-consuming
The goal of eviction is three-fold. The first is to have the tenants removed from the
property. The second is to get legal possession of the property. And the third is to get a judgment
so additional collection measures, such as garnishment or levy of personal property, may be pursued.
When the tenant stops paying either voluntarily or involuntarily, having a quick repossession
is paramount to getting the investment property performing again. The eviction process is the quickest
and most cost-effective way to do this. With legal possession, we can take actions to once again get
our investment property performing.
Monthly income from investment property under a lease-option agreement is generally considered
to be rental income. Rental income generally falls under the category of "passive activity
income" within the view of the IRS, which is taxed lower than personal service income
Further, some of the upfront money collected such as security deposits can be tax-deferred
until the day the landlord claims the money for compensation for damages or losses. Additionally,
option money can be tax-deferred until the tenant either leaves the property or exercises the option,
whichever comes first.
If the property is sold after 12 months of ownership, it is generally taxed at long-term
capital gains rates, which are often much lower than earned income rates. Additionally, if advanced
notice is provided, investors need not take the profits. The IRS allows property investors to do a
tax-deferred "1031 exchange" so that all the profits are rolled into another property of
Note: As in the case of all taxation matters, you should consult a CPA or other expert
Many lenders and investors recognize lease-option transactions as a form of owner-financing.
It gives the tenant full use of the property, but also the right to buy. This can be a favorable
arrangement for both tenant and landlord. When done correctly, both parties’ interests are fulfilled.
Since the lease-option transaction is often recognized as a form of owner-financing, it often
facilitates greater ease in getting a new loan for the tenant so he can successfully buy the property
and ultimately have title transferred into his name.
Matthew Chan is the author of
"TurnKey Investing with Lease-Options",
"The TurnKey Investor's 'Subject To' Mortgage Handbook", and
"The TurnKey Investor's Lease-Option Documents Collection".
You may contact Matthew at 706.565.5090 or you can email him at: email@example.com.
You can also find Matthew at MatthewChan.com.
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