Consider lease options and other alternative methods of selling income properties for a bigger bang for your real estate buck.
The best path to creating long-term wealth is by owning high quality, high equity, passive cash-flowing assets, like investment properties. If you’re in the property investment business, you’re going to want to learn about lease options, one of the best ways to leverage your holdings for the biggest payback possible. Read on.
Normal Exit Strategy
Here’s a typical “normal” exit strategy for a property. Let’s say you just sold a rehabbed house to a retail buyer. Let’s say you were asking a $150k list price, but as often happens, the property doesn’t sell right away. So you drop the price, and it ends up selling for say, $132k. But, after closing costs and realtor commissions and seller concessions, you’re probably going to net from the title company about $115k. Not so great, right?
Alternate Exit Strategy: Lease with Option to Buy
Consider using an alternate exit strategy as a faster path to long-term wealth. Let me explain. An alternate selling strategy is to sell your properties on a lease with an option to buy. In this scenario you structure a rental agreement and a purchase and sales agreement with a pre-agreed upon price for that property that is good for the next 12 to 24 months. The buyer puts down a non-refundable Option Deposit. If they destroy the house, or if they vacate the property and leave the house, they will lose that Option Deposit.
Advantages of the Lease with Option to Buy Exit Strategy
- You Get Full Price – You will nearly always sell the property for full price. You’ll sell the property for top dollar because your renter/buyer cares less about the future sell price and more about being able to move into the property right away.
- You Get More Potential Buyers – You will always get more eyeballs looking at your property with a lease option deal. Why? Because many folks don’t have full, or any, financing lined up with a bank, but want to get into a house they could end up owning.
- You Get a Better Tax Rate – When you hold properties for more than a year you qualify for capital gains taxes instead of ordinary income tax.
- The Buyer is Responsible for Upkeep – Buyer is always responsible for the managing and upkeep of the property. They’re responsible for utilities, repairs, overall condition, maintenance, and general management of the property.
It turns out that serious real estate professionals are turning, more and more, to alternative exit strategies like lease with option to buy, as a way to build and retain more of their long-term wealth. After taking a look at the advantages outlined above, it’s hard to argue with that strategy.
If you want to learn more, you should check out the Real Estate Investing Made Easy podcast episode Josh did recently about alternative exit strategies, including lease options. You do not want to miss this one.