Real estate investing can be an incredibly profitable venture if done correctly. One of the most popular strategies for investing is to use lease options and subject to deals. These strategies allow investors to purchase properties with little to no money down and create cash flow without the hassle of traditional financing. In this article, we will explore the concepts of lease options and subject to deals, how to combine them, and the three ways investors can make money with these strategies.
Lease Options
A lease option, also known as a rent-to-own or lease purchase, is a contractual agreement between a property owner and a tenant that allows the tenant to rent the property for a specified period with the option to purchase the property at a predetermined price. In a lease option, the tenant typically pays an option fee upfront that gives them the right to purchase the property at a later date.
There are two main components of a lease option: the lease agreement and the option agreement. The lease agreement outlines the terms of the rental agreement, including the monthly rent, the length of the lease, and any other provisions that apply to the tenancy. The option agreement outlines the terms of the option to purchase, including the purchase price, the length of the option period, and any other provisions that apply to the purchase.
Lease options are a popular strategy for real estate investors because they allow them to control a property without owning it outright. The investor can lease the property to a tenant and collect rent while also allowing the tenant to build equity through the option fee and any additional rent payments that go towards the purchase price.
Subject To
Subject to, or sub2, is a real estate investing strategy that involves taking over a property’s existing mortgage payments without assuming the liability of the mortgage. In a subject to deal, the investor takes ownership of the property subject to the existing mortgage, meaning the investor is not personally liable for the debt.
In a subject to deal, the seller typically transfers the property to the investor through a quitclaim deed. The investor then takes over the mortgage payments and becomes responsible for maintaining the property, collecting rent, and managing any tenants. The investor can then sell the property or refinance the mortgage to cash out their equity.
Combining Lease Options with Subject To
Investors can combine lease options with subject to deals to create a powerful real estate investing strategy. In a lease option subject to deal, the investor takes over the property subject to the existing mortgage and leases the property to a tenant with the option to purchase. The investor collects rent from the tenant while allowing them to build equity through the option fee and any additional rent payments that go towards the purchase price.
The benefit of combining lease options with subject to deals is that it allows the investor to create cash flow from the rental income while also allowing the tenant to build equity towards the purchase of the property. The investor can then sell the property or refinance the mortgage to cash out their equity.
How do you make money 3 ways with Lease Options and Subject To?
When you Purchase
The first way investors can make money with lease options and subject to deals is when they purchase the property. In a subject to deal, the investor can purchase the property with little to no money down, allowing them to conserve their cash for other investments. The investor can also take advantage of any equity the seller may have in the property and create instant cash flow from the rental income.
During the Lease Option Period
The second way investors can make money with lease options and subject to deals is during the lease option period. The investor collects rent from the tenant while also allowing them to build equity through the option fee and any additional rent payments that go towards the purchase price. The investor can also negotiate a higher purchase price for the property at the end of the lease option period to realize a profit from the sale of the property.
When You Sell
The third way investors can make money with lease options and subject to deals is when they sell the property. In a lease option subject to deal, the investor can sell the property to the tenant at the end of the lease option period for a profit. The investor can also sell the property to another buyer, either through a traditional sale or by assigning their interest in the property to another investor.
The benefit of using lease options and subject to deals is that they offer investors multiple ways to make money on a single property. By combining these strategies, investors can create cash flow from rental income, build equity through option fees and rent payments, and realize a profit from the sale of the property.
Risks and Considerations
While lease options and subject to deals can be a lucrative real estate investing strategy, they also come with risks and considerations. It’s important for investors to thoroughly research the property and the seller before entering into a lease option or subject to deal. Investors should also consult with a real estate attorney and/or accountant to ensure that they fully understand the legal and financial implications of these types of transactions.
One of the main risks of lease options and subject to deals is the possibility of defaulting on the mortgage. If the investor is unable to make the mortgage payments, the property could be foreclosed upon, and the investor could lose their investment. It’s crucial for investors to have a solid plan in place for managing the property and ensuring that the mortgage payments are made on time.
Another consideration is the potential for the seller to default on their mortgage. If the seller fails to make their mortgage payments, the property could be foreclosed upon, and the investor could lose their investment. Investors should research the seller’s financial situation and credit history before entering into a lease option or subject to deal.
Conclusion
Lease options and subject to deals are powerful real estate investing strategies that can allow investors to purchase properties with little to no money down and create cash flow without the hassle of traditional financing. By combining these strategies, investors can create multiple ways to make money on a single property, including rental income, building equity, and realizing a profit from the sale of the property.
While lease options and subject to deals come with risks and considerations, they can be a lucrative investment strategy when done correctly. It’s important for investors to thoroughly research the property and the seller, consult with a real estate attorney and/or accountant, and have a solid plan in place for managing the property and ensuring that the mortgage payments are made on time. With careful planning and execution, lease options and subject to deals can be a profitable addition to any real estate investor’s portfolio.
