A real estate Option is the most useful of all real estate tools when it comes to making money. Not only can it control future profits, but also current profits when used for that purpose. We are all familiar with the benefits of Optioning land at a given price, then getting it rezone for a higher use, or finding a builder/developer who will joint venture to increase its value, or putting a mobile home on it to increase its value before exercising it.
A less known use of Options is when a property is being bought by you under a Lease/Option. Your Option can call for high Option payments, each counting toward the purchase price, and low rent payments. It could also be used to motivate a seller to hold the rents constant for several years prior to exercising the Option. When you subleased the property, your low rents would generate extra cash flow for you.
You might even negotiate a portion of the rents to also be applied toward the purchase price; so during the term of the lease, you could build equity by having a portion of the rents counted toward the purchase price.
The key to his is that your lease would give you the right to sub-lease, so your tenants could be paying the rent and earning credits toward the Option price that you will be able cash in on.
Another use of an Option is to control rents, and thus control value. Suppose you were renting a house and were willing to pay the landlord extra rent for an Option to Lease the house at a set rent for a number of years. This would set a cap on the rents even though the operating expenses, taxes, insurance, etc. might be climbing. If you subleased the property, each successive tenant could be paying more rent to you out of which you’d be paying the same low rent to the landlord.
Even though you had no Option to buy the property, at some point in the future the owner is going to approach you to buy the property because your low rents are going to cost him more than he is making after paying his rising costs. Your lease will make the property very unattractive to other landlords, and you might be the only buyer. You might be able to convert your lease into ownership of the property at a heavily discounted price.
On the other hand, for years, in lieu of rental deposits, I have used a payment for an Option to extend my Rental Contract for another year at a rent of no more than 10% more than the current rent. For this I am paid a sum roughly equal to what would have been a rental deposit, but which differs in that it will not be returned nor ever counted toward the rents.
Each time I want to raise rents, I set them just below the 10% mark and explain that my costs haven’t risen quite so much and I’m passing the savings on to the tenant who has been programmed that 10% rent raises are inevitable by his Option to Lease.
