A lease option is a commonly used strategy that is essentially ‘buy now, pay later’ with the added bonus of making money in the middle for the person doing the lease option.
With a lease option you agree to lease (rent) the property for a period of time normally 3 to 5 years.
You also agree to a purchase price which gives you the ‘option’ to buy the property at the pre-agreed price. You can exercise the option to buy at any time during the agreement.
The bonus with Lease Options is two-fold:
1. You agree a price for the property today (but you benefit from capital growth for the term of the lease option which could be 3 to 5 years or more. This means you could negotiate yourself a below market value property purchase.
2. You also agree to sub-let the property to either a tenant or multiple tenants or use it as a Serviced Accommodation property and let it out by the night.
Breaking it down, you LEASE the property, and you also have the OPTION to buy the property.
Here's how you can potentially make money by combining a lease option with subletting or using the property as serviced accommodation:
Subletting with a Lease Option:
The Money-Making Middle Bit: Your profit lies in the difference between the rent you pay to the owner and the rent you collect from your sub-tenant.
Here's the Breakdown:
Negotiate Well: Aim for an agreed monthly fee you will pay the owner, that allows you to make £300+ minimum profit per month.
Find the Right Sub-tenant: Research your local rental market and work out the market rent, so you know what you can let it out for.
Alternative Uses: Research if you could let the property as either a HMO or maybe as Serviced Accommodation (holiday let). This could increase the cashflow and allow you to make much more profit each month.
Basic Example of a Lease Option (Monthly Picture):
You secure a lease option with a monthly rent paid to the owner of £1,000.
You sublet the property to a tenant for £1,500 per month.
Your profit would be £500 per month.
Example of Lease Option (Long-term Buying Picture)
The property is worth £100,000 (todays value)
You agree to pay £105,000 (giving the owner more than its current value)
The area has shown 6% growth annually for the last 3 years
If this continued for the next 3 years, the property would benefit from 18% growth and be worth approximately £118,000 to £119,000 in 3 years’ time.
OK so now you should have a good understanding of a lease option but what are some things you should be aware of…
Important Considerations:
Lease Agreement: Ensure your lease agreement with the owner permits subletting. Some agreements might restrict it.
Sublease Agreement: Have a clear and legally binding sub-lease agreement with your tenant outlining responsibilities and rent payments.
Market Fluctuations: Be aware that market changes can affect both your subletting income and the eventual purchase price.
Let’s take a quick look at how you can offer a lease option but change the end usage to increase your cash-flow monthly.
Serviced Accommodation with a Lease Option:
Serviced Accommodation: This involves renting out the property on a short-term basis (e.g., weekly, nightly) and providing additional services like cleaning and linen changes.
Increased Cash Flow: Serviced accommodation can potentially generate higher rental income than traditional long-term tenancies. However, it also involves more management and operational costs.
Beware of Restrictions: The mortgage on the property may restrict the properties usage to single let only, so have the landlord/owner, check if it could be used as an S.A. (holiday let) first of all.
Making it Work:
Research & Calculations: Thoroughly research the short-term rental market in your area. Consider factors like occupancy rates, competition, and pricing strategies to project realistic income.
Management Considerations: Factor in the additional costs of managing a short-term rental, including cleaning services, guest amenities, and potentially a platform fee (if using Airbnb or similar).
Lease Agreement: Similar to subletting, ensure your lease agreement allows short-term rentals.
Regulations: Be aware of local regulations regarding short-term rentals and any licensing requirements. This will be much more difficult in London as restrictions are in place regarding short term lets.
Remember:
Serviced accommodation requires a lot more effort than traditional rentals, but it can potentially boost your cash flow.
Overall:
Combining a lease option with subletting or serviced accommodation can be a creative way to make money, but it comes with its own set of risks and requires careful planning and execution.
Here are some additional tips:
Consult with a financial advisor and property solicitor to assess the viability and legal implications.
Start small and gain experience before scaling up your operations.
Maintain a healthy buffer to cover unexpected expenses and potential market fluctuations.
Speak to Others: Speak with other people that are doing this already. Seek out people operating R2RSA units and ask if you can pick their brains on their own processes and if they hit any stumbling blocks. It pays to be prepared before taking action and negotiating the options.
By being well-informed and making informed decisions, you can use these above strategies to maximize your potential returns with lease options.
In Part Two we will cover what type of properties to look for, so check back here for part two later this week...
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