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The TurnKey Investor's 'Subject To' Mortgage Handbook
by Matthew Chan


TurnKey Investing with Lease-Options
TurnKey Investing with Lease-Options
by Matthew Chan


TurnKey Investor's Lease-Option Documents Collection
TurnKey Investor's Lease-Option Documents Collection
by Matthew Chan









Article by Matthew Chan

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.

  Higher Rents

  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.

  Flexible Use

  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 removed.

  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 and expensive.

  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.

  Tax Benefits

  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 (earned 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 "like-kind".

  Note: As in the case of all taxation matters, you should consult a CPA or other expert financial counsel.

  Alternative Financing

  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: admin101@turnkeyinvesting.com. You can also find Matthew at MatthewChan.com.


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