The business model for most lease options is for the investor/buyer to position themselves between the owner/seller and a tenant with five objectives in mind.
Objective 1– Achieve continuous cash-flow with a low entry level of initial capital from the property and target a net annual return on capital investment of 35%+.
Objective 2 – The property increases in value above the sellers agreed fixed purchase price within the option period; this allows the buyer to cash in by exercising the lease option. (We call this the cherry on top!)
Setting a Property’s Value and Agreeing a Future Purchase Price-
Because the agreed future sale price has to be locked in at the beginning of the agreement, it is crucial that the investor negotiates a realistic purchase price so there is a reasonable opportunity to sell the property above the future price at the end or during the option term.
Protecting your investment –
Common misconceptions are leading investors who invest in lease options, to enter new tenancy agreements by putting themselves on the tenancy agreement as the “landlord”.
The model for lease options is great – but like every investment strategy it has advantages and disadvantages. Legally, only an owner of a property can grant an assured short hold tenancy (AST) agreement.
The owner needs to remain on the tenancy agreement;the option taker will become the property manager and benefits from the rental payments, in exchange for the financial liabilities of the property.
Begin with the end in mind – See the deal from start to finish
Example – Lease Option Fee – £5,500
This diagram below shows how to set the exercise price for a property currently valued of £95,000 with an outstanding £90,000 mortgage. This property is in £5,000 negative equity.
The exercise price is set at £105,000, leaving the owner a potential
£10,000 profit when the property is sold.
An intrinsic value of £5,500 is immediately built in for the investor as the initial option fee. By taking a ten-year option period; time is built in to allow intrinsic value to increase in line with the home’s market value.
This typical property will gross a cash flow of £200-£250 per calendar month. This means that during 10 year option, there is a potential cash flow of £24,000 – £30,000 just from the monthly income.
The investor’s intrinsic value begins to increase between year 6 and 10, projecting a back end gross profit after sale of £15,000.
From one lease option deal the total gross potential profit illustrates a soaring £39,000 – £45,000.
Objective 6 –
Understand that lease options are built on the premise of a “WIN/WIN” situation.
Control Cash Flow Positive Investment Property With No Mortgage Deposits!
Have you always wanted to invest in property, but don’t have the funds for a big mortgage deposit? Maybe you can’t get the funds due to self-employed status.
Whatever the reason, if you are interested in investing in property, have the passion to be a property investor, we have the solution for you!
LEASE OPTIONS EXPLAINED-CLICK ON THE LINK BELOW: