You may not be familiar with purchase lease options, but for many property investors, they’re a lucrative investment strategy.
WHAT IS A PURCHASE LEASE OPTION?
As the name suggests, the option is the right to buy at a fixed price in a certain time period – but without the obligation to do so.
Therefore, a purchase lease option is a legal agreement that gives you control of a property that you can generate income from – with the right to buy later.
- For the lease element of the agreement, you fix a monthly payment with the property’s owner. This enables you to manage the property and rent it out to tenants for a profit.
- For the option element, you agree a price at which you have the option to buy the property at a later date, if you choose.
There has to be some upfront payment, but this can be as little as a £1, to make it legally binding.
HOW DOES A PURCHASE LEASE OPTION WORK?
Here’s how it works from each side:
- The owner will need the monthly payment to cover their mortgage and any other costs.
- If you’re taking out the lease, you need to be able to generate income from the property, to cover what you’re paying the owner and make a profit.
Next, you need to fix a purchase price for which you have the option to buy the property for at some point in the future. Then you need to determine the period of the agreement, after which you either buy or hand back the property.
Finally, decide on how much the upfront payment should be, and that will make the option legally binding.
WHAT ARE THE BENEFITS OF PURCHASE LEASE OPTIONS
The main benefit of a purchase lease option is that you can generate rental income from a property without the need to buy the property or take out a mortgage with a 25% deposit.
If the value of the property goes up beyond the agreed purchase price during the term of your agreement, you’re in an equity position if you buy it. However, if the value drops, you don’t have to take out the option to buy, you can just walk away at the end of the agreement.
WHERE CAN YOU FIND PURCHASE LEASE OPTION OPPORTUNITIES?
You may ask, what’s in it for the property owner. The answer is there are a variety of different scenarios that may lead an owner to choose this option.
Some owners may have become tired of being landlords or perhaps want to retire. This way, they can offload the hassle of managing the property onto someone else.
Or the owners could be in a position where they’re in negative equity, and they owe more on their mortgage than they can sell the property for. This becomes a problem if they want to move. They may not want to take on the role of landlord and rent out the property themselves, so instead opt for someone else to pay them a fixed fee while taking the responsibility of managing the property out of their hands.
It’s worth keeping an eye out for purchase lease option opportunities as they’re a low-risk way to generate income from property.
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