Epic Real Estate Investing - Lease Options | Creative Real Estate Investing for Beginners | 1011

Episode Date: May 7, 2020

It’s never a money problem that holds you back but rather an idea problem! Creative real estate investing is the practice of inserting an idea in a place of money! In today’s episode, Matt shares how to use lease options in your creative real estate investing and control a huge amount of properties with little to no money! Tune in and find out more! Learn more about your ad choices. Visit megaphone.fm/adchoices

Creative real estate investing is the practice of inserting an idea in place of money. As a real estate investor, it's never a money problem, but rather an idea problem. Boom! You don't need a lot of money, you just need a lot of ideas. We refer to these creative ideas as terms. Terms like equity sharing, options, lease options, agreement for deed, seller carryback, subject to, wraps, all-inclusive trust deeds, and so much more. But right now, I'm going to show you how to use lease options in your creative real estate investing.

This is Terrio Media. Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep listening. you want it faster visit r-e-i-a-aise.com here's math a lease option is an agreement in which an

owner allows a person to use a property in exchange for rent and also gives the person the right to buy the property for specified price within a specified period I see it like this you buy the property today but you don't have to pay for it until later and you get to use and profit from the property in the meantime while you wait and I would consider a lease option purchase the most flexible strategy as it's easy to get into and it's easy to get out of. You can make money today, make money every month, and make some big money down the road. And I'll get into all three of those profit centers of a lease option purchase in just a minute. But there's something even bigger at play that you're going to want to know.

Something that you won't hear from too many people, if anybody at all. It was Nelson Rockefeller, son of John D. Rockefeller. He famously once said, the secret to success is to own nothing. but control everything. And his quote is really referring to asset protection. But I look at this quote a little bit differently than most. With my focus on the control everything part. And here's why, real estate has always appreciated.

And I see no reason or evidence for it to stop. We've discussed that endlessly here at Epic. And so I'm not going to go into the details of that right now. But when you look at another famous quote by JFK, John F. Kennedy, A rising tide lifts all boats, with that rising tide in our context being real estate appreciation and those boats being property. So the more property you control, the more property you have that's lifted, the greater your wealth rises. Thereby making the name of this real estate game, control.

And what makes this lease option idea so compelling is it gives you the ability to control a lot of property or a lot of boats, if you will, using the way. very little to no money and when done right with very little risk. Wealth is a result of control and lots of control can be had with lease options. Now, let's break this lease option down. The option is what gives you the buying power. See the last lesson for how the option works. The lease portion works like this. In lease agreement, the owner is the lessor and the investor is the lessee. The lessee pays the lessor a monthly fee. That's your lease payment that you pay for the right to use the property. With the option and the lease working together in one

transaction, that gives you a lease option purchase. Like any other investing strategy, you want to buy low and sell high, and there are three opportunities to do this with lease options. And it works like this. We call this our A to B transaction, with A being the seller and B being you, the investor. And as an example, we'll use this house right here valued at $100,000. You negotiate an option price of $80,000. In exchange for that, you give the seller a non-refundable option. option fee of $2,500 that will be applied to your purchase if you purchase within three years. That three-year window is your option term. You will then pay the seller a monthly lease payment of $800 for three years. The most common exit strategy are B to C transaction. You are still

B in this scenario and you would turn around and immediately find a new tenant buyer, C, who will then option the property from you at, say, $110,000. Because tenant buyers will pay the future price of the property and will typically be happy to pay a premium if they don't have to deal with a bank. And they pay you a non-refundable option fee of $5,000 and then pay you a monthly lease payment of $1,100. Your three profit opportunities here are the option price where you will make a $30,000 profit should the tenant buyer purchase the property, the option fee of $2,500 right up front, and then a monthly positive cash flow of $300. This is called a sandwich lease, and it is what's most common. alternative exit strategy is to lease option the property while you fix it up in preparation to

flip. So compared to the cost of borrowing money to purchase the property before you do the fixing, a lease option can be considerably cheaper when doing a short-term lease option. Another popular exit from a lease option, particularly if you don't want to deal with tenants in a sandwich lease or the rehab of the fix and flip, you could just wholesale the option. Using our previous example, you'd sell your option to another investor who will assume the responsibilities of the tenants and or a rehab or whatever they're going to do with it. Something also to consider if owning your home is a part of your American dream, maybe you come across just the right property that you want to keep for yourself to live in. A lease option is a great approach to getting an

amazing deal on the purchase of your home. Not common, but not uncommon either. Back to the investment side. The terms of your lease option agreement will be important to both maximizing your upside and minimizing your risk. If those are important to you, you're going to want to consider these 10 pro tips. One, go low on price, long on term. Negotiate the lowest option price possible for the lowest option fee possible with the longest possible option term. As is the case in when buying property all cash at a deep discount, the same is true here. The foundation of every real deal lies within the seller's motivation to sell. The more motivated the seller is, likely the better the terms you'll be able to negotiate. Most typically, your motivated seller is going to be a frustrated

landlord. Two, cover the seller's mortgage. Your lease payment should be as low as possible, as low as you could possibly negotiate it, but it should at least equal the seller's mortgage payment. You don't want to make lease payments to the seller that don't give them enough to make their mortgage payment on the property and keep it in good standing. Three, match the terms. When negotiating the option term and the lease term, you want to make sure that they equal each other. As in our example, if you have a three-year lease, you want to get a three-year option. You don't want the seller changing the terms of your lease midway through your option. And you don't want to be obligated to pay rent on a property. You no longer have the right to buy. Four, get the right

to sublet. Your right to earn monthly income from the property comes from your right to sublet. So make sure that you have that in your agreement. This gives you the right to execute the sandwich lease exit strategy. If you're lease optioning a multi-unit building, you'll hear the right to sublet referred to as a master lease. Five, break up the option. If you don't have the amount of money that the seller wants for the option fee, or even if you do, you can add more money to the monthly lease payment to pay for the option fee, of which requires less money from you up front and reduces your risk. You may also want to carve out a portion of the monthly payments you're making to the seller

anyway to be credited to your purchase price. To reduce your balance, do at the time should you decide to purchase. Six, get a buyout. You want the buyout clause in your lease in case you decide you don't want to exercise your option. If you decide you don't want the property and you still have a year left on the lease, this could cause an expensive problem for you. Get the buyout.

7. Clarify insurance. This must be addressed and clearly spelled out in the lease option agreement. I mean, if the house floats away in a flood or burns down or collapses in an earthquake, you want to be covered. Especially if you have invested money into the property. Eight, get the right to renew. You'll want to insert a lease renewal and extension clause in both your lease and option agreements

for when things are wrong. working out really nicely and you may want to keep it going the way it is before having to execute your option or maybe your tenant buyer needs some additional time to execute their purchase. Nine, ask for maintenance participation. Usually the responsibility for maintenance goes with the lessee. Nonetheless, you should always try to negotiate shared costs and responsibility. Responsibility for maintenance should be clearly spelled out in the lease option agreement. If the water heater goes out in the first few months, you will want the seller to participate in the costs. Ideally, the seller and the investor would share equally in maintenance costs.

Most sellers, however, agree to a lease option because they believe they will have no more responsibility for the property. But ask for the clause anyway. It's not a deal breaker if you don't get it, though. 10. Play WIIFM for the seller. It's everyone's favorite radio station, WIIFM, what's in it from me? During your negotiations, always focus on what's in it for the seller. Like, no more tenant issues. The mortgage payment's going to be covered. And a key benefit to the seller is their ability to avoid capital gains taxes in the short term. Giving the seller multiple options can be really helpful to you as well in reaching an agreement. If you're a my way or the highway type person, you limit your potential by giving the seller one of two choices, to either

take your offer or go look for another investor buyer. But if you give the seller choices, they are more likely to choose one with you. You may offer the lease option for a certain amount under certain terms, or you may pay less, much less, in an all-cash offer. Or, or, you may pay less, you may offer one of the other many creative options that we have yet to explore. Meet me in the next lesson and we'll take a look at another creative idea and much more beyond that even. If you want to go beyond that right now, you can download the same cheat sheets I give to my private clients at epicbreakthrough.com. I'll see you next time. Yeah, yeah, we got the cash flow. Huh? Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow.

You didn't know home for us, we got the cash flow. the C-suite radio network. For more top business podcasts, visit c-sweetradio.com.