Rent, Sell (Flip), Lease Option
There is always more than one way to make money!
I have seen more than a few investors buy and remodel a rental property with the intention of renting. Nothing wrong with that, that’s who I wrote this book for. However, many investors get to this point and wonder if they can just sell the property and cash in big now while it looks so good. I say, yes, maybe you can. If you start out on the rental path and later want to try to sell that is not a problem. If it doesn’t sell, keep it! You bought it as a rental anyway! On the other hand you cannot buy a house that you intend to flip, remodel it and then try to profit by renting it. It may work in certain circumstances, but not very often. If you are remodeling to flip a house you will use better paint, carpet and cabinetry. The ends will not justify the means if you rent. Your property will likely be over improved. You cost basis will likely be higher because you bought in a better neighborhood. Please read my other book on flipping property titled, Flipping for Profit like a Pro.
Generally speaking if you bought a property to eventually rent then you should usually stick with the plan. In that case you can read my book on rentals titled, Rental Profits without the Pain.
There is a hybrid approach to cashing in that works really well in a tight money market. A tight money market is a market in which borrowing money is a little tougher than normal. The basic concept is that of a lease with an option to buy. This is actually two different disciplines. Also, notice I did not say “Rent to Own”. NEVER do a rent to own. When you rent to own, you are earmarking a certain portion of the rent to be counted as part of the purchase price of the house. This gives the tenant an equitable interest in the house which is a loose form of at least one of the seven rights of ownership. What this means to you is that if the tenant stops paying rent or you have to evict them for any reason you will not be able to. The way the law works in these matters is that you will have to foreclose on the tenant because of their equitable interest in the property. An eviction may take about one month. A foreclosure will take at least a year or more in most cases. It depends on the state. What matters is that you put yourself in a very risky position with a rent to own. A lease option is not as risky.
A lease option is really two transactions. One transaction is to rent the property to a tenant. This is strictly a lease standing on its own two feet. The option is really an option document where you, the optioner, are giving the optionee (your tenant) the right to purchase the property at a later date. They have to purchase this option from you for a fee. The option fee is non-refundable. If they don’t exercise their option by a certain date you can either extend the option period for another fee or not extend it and they simply remain as tenants. If they do not pay their rent you can evict them because the option fee they paid you does not count towards the purchase price of the house. They just purchased the right to purchase the house at a later date. The fee they pay you covers the risk you take by taking your property off the market for the option period. The price is usually locked in so you have the risk of not realizing any appreciation in that period of time. You also assume the risk of normal wear and tear on your property. And if that’s not enough, you are doing the tenant the favor of giving them time to get their finances in order enough to secure a loan to pay you off. During this time you will be their biggest creditor. One of the big advantages to this is that if they don’t end up buying, you keep the option fee and can try to lease option again. I have had houses I lease optioned three times before they sold. I came out the winner not just because I got to keep the option fee but also because I charge more rent on a lease option and they generally take good care of the property because their intention is to buy. So even when a sale doesn’t go through, a situation most non-investors see as a failure, you still win!
To learn more about these different techniques please call me at 1-800-931-2605 or email Gary@WinReatyAdvisors.com. You can also learn more by visiting MyInvestmentServices.com. There are books and training courses designed for you to learn how to become an expert and profit in a number of ways with real estate investing. Visit MyInvestmentServices.com for more tools and information. Some books are Free!
Written by Gary Wilson 5/5/14, MyInvestmentServices.com