There are many creative uses for lease options for both residential and commercial properties but few people realize lease options can be a great cost-lowering tool for rehabbing properties. A little creativity gets you in and out of the property for substantially less cost than if you purchased the property outright.
When you purchase, you need to either pay all cash or make a substantial down payment and pay a bunch of closing costs and junk fees to take out a mortgage. People trying to unload a property in poor condition are willing to give you a an assignable lease option. Being able to assign the option to another buyer means no closing costs for you.
When you use a lease option your only cost to get into the property is a modest purchase option fee. Now you have control. Just be sure you include a clause in the option contract allowing you to make improvements to the property. It’ll be easy to convince the owner of a junk property to make improvements costing him nothing.
Your next savings comes from a reduced rent based on the poor condition of the property. How much can be knocked off the rent varies based on the property condition and the local rental market. In today’s market, a 40% reduction can be expected. That means if the going market rate is $700 and you add a lease option premium of $150 per month, the going lease option rental rate will be $850. But based on poor property condition you discount the $700 market rate by 40% down to $420. Add the lease option premium back in to come up with a $570 monthly rent with the $150 being credited towards your purchase price.