When financing dried up and the market slowed, I found myself with an inventory of Options and no money, so I began to combine Options with leases under the terms of which, I had the right to sublease the property until it sold so long as I paid all property expenses and mortgage payments. Bear in mind that I did things differently from most people. Instead of leasing a property and then trying to negotiate an Option, I Optioned a property, then tried to negotiate a lease. This grew as a natural progression to my Options.
From time to time, when I agreed to make a departing owner’s payments, I was able to arrange to Lease/Option the properties. Some of my Options ran for as long as 7 years. During this period, my ‘spreads’ added hundreds of dollars to my income. Consequently, I was rarely in a hurry to sell. This had a beneficial side effect. From time to time an owner, in a hurry for cash, would discount his equity for me, or give me $2 credit against the purchase price for every $1 that I’d agree to pay him monthly out of my rental cash flows. I discovered that leasing could often be a lot smarter and profitable than owning.
Suppose you could buy a nice, modern, well located, attractive $100,000 house which would rent for $850 per month? Terms might be $10,000 down and payments at 8% per month, interest only. Would you consider that to be a good deal? Let’s see. You’d be paying 8% of $90,000, or $600 monthly. Let’s say taxes and insurance would add up to $1500. Hired management could cost 10% – or $1,000 over the year. If you had one month of vacancy each year and 5% of gross rental income for repairs and refurbishment that would cost $500.
These costs would reduce the $10,000 per year gross rental income to $7000. You’d be losing $200 per year even with these optimistic assumptions. Don’t buy. Instead, offer to lease the property from the owner for $800 net after all commissions, if any, with the right to sub-lease or assign the lease. Offer to trade a commitment for a 5 year lease guaranteeing no vacancies or refurbishment costs during that time for $100 per month rental discount. In return for doing all minor maintenance up to $100 per month (NOT the first $100), try to negotiate an additional $25 discount.
Your lease period would commence as soon as you found a suitable tenant at $850. After all the discounts, this would leave your rents to the owner at $675 and give you a positive gross cash flow cushion of $175 per month. Surely you’ll have some extra costs, but over time – except in a fast rising real estate house market – you could come out way ahead on profit using a master lease rather than paying $10,000 for $200 a year negative cash flow. How can you do this?
You’ll need two documents to make this transaction- (1) A simple lease under the terms of which you leased the property. (2) A comprehensive lease under the terms of which, your sub-tenant would be responsible for as many of the repairs and incidental costs as possible.
See Jack Miller's Buying Houses from A to Z for these documents.
