If you are ready to jump into real estate investing but need to know how lease options work? Every new investor will definitely want to understand this idea, so I’m going to break it down for you today.
How Do Lease Options ACTUALLY Work in Real Estate Investing?
Before you can REALLY appreciate the value of lease options and find out how lease options work, you need to understand the normal path people take. I know you know what a mortgage is, but do you really understand HOW they work?
Most people generally assume that they will one day get a mortgage, because that is just what people do. We have been conditioned to think that this is the only way to buy houses. The only thing we ever hear is to put that 5-20% down on a house, make the monthly payments and in 30 years it will be yours. We are not taught to do the actual math for how much we will pay for that house.
The only thing we hear about is the monthly payment. “Save up the money to put down, then make sure you can afford the monthly payment and in thirty years, POOF, it will be gone.”
30 years!! I can’t even imagine being committed to ANYTHING (besides marriage) for that long! It’s crazy, but it is exactly what everyone thinks is the right way to buy houses.
When you get a typical mortgage, you are literally making a commitment to that house for the next three decades! Can you imagine how much you are going to change over the next thirty years, especially when it comes to your house or where you want to live?
This is NEW! I mean, if we take a look at history, mortgages and real estate agents have only been around for about a hundred years! These things were all invented. And, everybody bought into it.
Don’t get me wrong. Mortgages are fine, but the big point is that they are NOT the only way to buy houses.
The way I buy houses breaks this whole thing apart to make house buying more accessible.
When I buy a house, someone else’s name is on the mortgage, but I make the monthly payments. Nothing about the mortgage changes, I take over making their payments and send the check directly to the bank.
Now, with the typical mortgage set up, the payments in the first 5-10 years are almost entirely going to INTEREST, not principle. So, you basically pay the bank their cut first. You barely even start to pay down the house price for yeaaarrrsssss.
For example, if you buy a $100,000 house and make a $1000 monthly payment, at the end of the year you will likely still owe something like $99,000 on the property. That $12,000 you paid throughout the year goes almost entirely to interest.
However, how lease options work is very different.
When I pay my seller the monthly payments, I actually pay down my principle and what I owe them on the property each and every month. We negotiate all of those details when we make the contract.
I find people who have had their house for at least 5-10 years, so they will have paid down some of the principle, reached the point where the monthly payments are going more to the principle, and their house value has likely gone up a bit in the market. These people are motivated sellers who nearly own the house but do not want to live there anymore.
Or maybe they started renting the house and don’t want to be landlords anymore. Whatever the reason is, they just don’t want to deal with the house anymore, but also do not want to list it.
All they want is someone to take over the payments for them. They want that quick fix.
So, I let them know that if they will pay the next 3 payments then I’ll take over the monthly payments for the next 5 or 10 years. And I can do that. The bank does NOT care who makes the monthly payment. They just want someone to pay it.
These deals are wins for those sellers, who become seller financers and act as the bank. It is definitely a great win for me because I buy that house based on what they owe, which is usually lower than the market value.
The way I make my deals lets me buy the house with no money down and I cash it out in 5 or 10 years. I also take over the maintenance and any work that needs to be done and then turn around and sublease it to a tenant.
Let’s say that I buy the house from the seller for $85,000 and pay $800/month for 10 years. Every month’s payment will pay down that principle by some amount that we decide.
Now, on the other side of this deal, I find a great tenant who is not able to get a mortgage at the moment, for whatever reason.
Maybe they have bad credit and need to build it up. Sometimes they are self-employed people making PLENTY of money, but just don’t fit the bank’s requirements. Or they could be recent hires who just moved to the area and the local banks want to see they will actually have a job to make the payments. This happens ALL the time.
So, I find these people and give them an option to buy a house. They have money. That is not their problem. But, they do not want to rent.
I take this house and put it up on Zillow, Craigslist, and Facebook with an ad that says something like “Hey y’all, anybody want to give me $105,000 for this house? You can put maybe $10,000-$15,000 down and move in after we get your application and work out the fine details. Then you can buy this house in a year or two. All you have to do is pay me $1100 a month.”
Y’all will be pleasantly surprised and shocked by the number of calls you will get from people who have that money and are happy to pay it!
These people are everywhere. You can give them a year or two to get their mortgage and be able to cash you out of the deal.
In this situation, if I sell it for $1100 a month at a purchase price of $105,000 (giving them a year to cash out) and they give me $10,000 upfront, I can make money three different ways. So, I make money with that $10,000 right away, especially since I gave my seller nothing for this property. My monthly payment to the seller is only $800 and I receive $1100 from my tenant. That’s $300 profit a month and $3600 over the year.
Also, if this tenant does get their mortgage in a year, I only owe $85,000 (or less, since I’ve been paying it down monthly) but they owe me $100,000 ($5000 of that initial money went to their principle). So, I will make $15,000 on the final sale of the property.
Overall, for this ONE property, I will make $28,000 between them all: $10,000 upfront, $300 a month ($3600 for the year), and $15,000 at the sale of the property.
Now, this is all assuming that my first tenant actually comes through with getting a mortgage in that year. Many times they do not. They decide to move on and forfeit their option to buy. So, now I do the whole thing again with a new tenant. I made $13,600 with this first tenant and now work with the same idea with another.
If that tenant buys, awesome. I will end up making another $28,000 (actually even more, because I will owe even less to my seller by that time AND the property value may have gone up a bit more than $105,000) in that second year at the sale of the house. But, if they move on again, the cycle just continues. This is fine with me, though, because I have 10 years to cash out on the property with MY seller.
Do you get it?
I didn’t even need to do anything with a bank or my credit! It is beautiful.
You CAN buy houses without mortgage brokers, banks, money down, or stress! There is so much more I could say about all of this because the whole system is so perfect, but let’s keep it simple for now.
Now you see how lease options work and the power that they offer. Are you ready to get started and dive into real estate investing? Make sure you check out my FREE masterclass to help you learn even more about growing your passive income with real estate. I give away all of my secrets for how to explode your income with this super simple strategy.
The time is now. It is not too late to build your legacy one house at a time. You got this!