Lease Options – Rent-to Own’s and Lease-To Own

I’m going to share a brief overview of this strategy and some options for financing.  This is really only an overview and if you want to use this strategy to purchase property please discuss this with me further.

You may have heard Lease Options conventionally referred to as a rent-to-own or lease-to own as an investment strategy to use to generate cash flow on properties where there might be little cash flow because of the type of property and typical rents for the area. You find a tenant-buyer who is willing to purchase the property from you in 2-3 years at a set price, and you charge them a premium on the rent that goes towards the purchase of the property, as well as an option deposit.  They sign a lease agreement, as well as an option to purchase the property (a seperate agreement). The lease would be a traditional lease, that you would normally have with a tenant.  The option agreement is an agreement between the property owner and the optioner to purchase of the property at the end of the term at a specified proce.

The tenant-buyer puts down a option fee, and usually has a portion of monthly payments go towards the purchase price.  Sometime the option agreement stipulates repairs under a certain amount are the resposbility of the tenant-buyer.  If the tenant-buyer doesn’t or cant buy at the end of the term, you find another tenant-buyer or extend the term of the rent-to-own.  There are more moving parts but this is the strategy in simple terms.

Let’s use an example of a property in Bowmanville.  You can change up the numbers and play with optiona mounts but you will get a better understanding of the numbers.  This freehold townhouse is selling for $285,000 and rents normally for $1450 + utilities a month.  With a mortgage of 228,000 at 3% Interest for a 5 year closed, with a 30 year amortization – mortgage payments would be $958.88 per month.  Taxes would be $245 per month.  And Insurance would be $100 per month.

Monthly Costs = $958.88+$245+$100 = 1303.88  with rents at $1450 we are going to make $146.12 per month.

Let’s say you decided to do a two year rent-to-own on this property and use a 5% per year appreciation rate.  The purchase price for the tenant-buyer at the end of 2 years is $314,212.50   If you were to find a Tenant-Buyer you could ask them for 3% as the option deposit.  For the Bowmanville Property it would be $8550 (285,000 x 3%).  Each month they would make a rent payment of $1450 and $350 towards the option payment.  At the end of two years there would be $16,950 (Initial Option fee + Monthly Option Fee) available to use towards the purchase of the property.  Funds for the option fees are often kept in a seperate account for accounting and financing purposes, and you need to keep all the cheqwues and statements that refer to the option agreement. You sell directly to the tenant-buyer without having to list the property and you can save on the Realtor fees.

These sample agreements are given to you with the understanding that you will have them reviewed by a qualified lawyer before you use them for investing and setting up a deal.