By Abhi Golhar
This isn’t a recipe for a lunch sandwich; it’s the recipe for rental property investing with little or no cash of your own. There is plenty of pie-in-the-sky noise out there about getting rich quick investing in real estate. This is a realistic article about one way to invest with little or no money of your own. There is one strategy that isn’t talked about a lot, but it could work in your market.
This strategy utilizes lease purchases to acquire a rental property and place a tenant in it using lease options. This can be a win-win-win for the three parties involved.
A. The Frustrated Seller
A seller who has had trouble selling the normal ways or must sell quickly to move and take a job is a great candidate for this investment strategy. You provide them with a way to move out of their home and not pay any other payments. They can move on with their life while you take over their house payments. They get to move right away, and you get control of the home.
B. A Rent-to-Buy Tenant
There are people out there who want to own a home, but they cannot due to credit problems, lack of a down payment, or both. You offer them a lease purchase on the home, and they can rent it while they fix their credit and save their down payment.
C. You, The Investor
By locating distressed sellers and helping them to move and also helping people who want to buy and get into a home, you’re providing a service to both. You’re going to profit handsomely as well, and here is how:
Steps in the Sandwich Lease Process
Step 1
You locate a seller who needs to move quickly, and they have a home with a low enough payment that you can rent it out for more each month; that’s your positive cash flow. You execute a lease purchase with them, giving you the option to buy the home at some date in the future, usually 3 to 5 years away at an agreed-upon price. You agree to pay their payments, and you pay them an option premium that helps them to move. This is whatever you can agree upon, but for this example, use $1,500.
Step 2
You have been marketing for rent-to-own buyers and have shown photos of the home to one who indicates they’d like to buy once they see the home. You execute a lease purchase agreement with them for the same period as the one with the seller. They have the option, not the obligation, to buy the home on or before that date. You charge them an option premium of $1,500, so you’re into this deal with no cash out of pocket. They like this, as it’s a lot less than a down payment.
Step 3
Your agreement sets the monthly lease payment at a higher number than the payment you’re making on the home. This is your monthly cash flow. The price at which you will allow them to buy the home is higher than the one you’ve agreed to with the seller.
You now have a profitable monthly rental with a profit at the end of the lease from the sale of the home. If the tenant doesn’t buy, you can renew your deal with the seller and place another tenant in the home, or you can walk away.
This isn’t a strategy for every market or every investor, but it’s providing nice cash flows for those who can use it appropriately.
For more questions about finishing well financially, get in touch with Abhi Golhar, CIO of Summit & Crowne.
