About Lease Options

Lease Options

Okay so I have told you what options are and how to value them. What are lease options? Well the clue is in the name! It is an option but also you get control of the property by leasing it for the period of the option.

So now you have an added dimension to the standard option. It is the lease element of it. This fast forwards your ownership of the property without really owning it.

Examples of lease options are:

Address	Lease Option
5 London Road	You can rent the property for £400 per month and you can buy this property for £250,000 if you complete by 1^st January 2011.
12 Acacia Avenue	You can rent the property for £500 per month and you can buy this property for £200,000 if you complete by12th December 2015.
4 Jones St	You can rent the property for £100 per month and you can buy this property for £55,000 if you complete by the 30^th June 2020.

Now before I spoke about the two Ps in options being:

Price

Period

Well I have another P for you:

Profit!

Profit is based on the difference between what you can rent the property off the owner for and what you can get on the open market. So look at this example:

A property has a market value today of £100k. You find a seller who will grant you an option to buy this property in 5 years time for £110k.

So the Price is £110k

And the Period is 5 years.

He will also let you rent the property off him at £300 per month as his mortgage payments are £300 and he just wants rid of the property. You know that the property will rent out no problem for £500. Then the potential profit to be made every month is £500 - £300 = £200.

This profit is possible every month for the next 5 years. So the overall profit would be the total number of months in 5 years multiplied by the monthly profit being:

5 years x 12 months x £200 = £12,000.

So if we were to stand back and look at the deal now the 3Ps would be:

Price: £110k

Period: 5 years

Profit: £12k

Now in the previous blog I valued the option at around £30,000 potential profit. (see previous blog). Now we can include the potential profit of the renting of the property which is £12k.

If we were to ignore inflation for a minute we would have a lease option with a potential profit of £30k + £12k = £42k.

Why Lease Options Are So Exciting

The reason why lease options are so exciting is because you can get on with your investing without the need of finance straight away. They fast forward your buying as you can take control of many properties very quickly and literally build massive portfolios in months even weeks.

The reason why I use the word invest is because as long as your options have the correct Ps being:

Price

Period

Profit

Then you will own that property without a doubt. I really want you to understand what I just said there. It is vitally important that you do understand that last sentence. You can own the properties which you are controlling by way of lease options.

Now there must be quite a few questions pinging in to your head right now. Trust me, it happened to me. It is a normal reaction! If no questions have arisen in your head then either:

you do not understand it

it is not for you

If you are in category 1 I suggest you re-read what I have spoken about on options as this is only the theory. It is important to understand the theory before you embark on purchasing options.

If you are in category 2 then this is ok. It is not for everyone. It can seem a lot of faffing about however it is only an invention from necessity. Once the mortgage market comes back then we are back to normal however lease options can be a true no money down system without the need for finance.

In my next blog I will tell you about Sandwich Options.

Posted on: 21st Sep 2009

Bookmark:

del.icio.us digg