When investors become involved in real estate, they are often interested in finding the best possible leasing options for their properties. A positive leasing deal can add to the profitability of the investment, ensuring that you receive the money you are due from your tenants in a timely fashion. David Ebrahimzadeh explains how to find the best lease options for your real estate investments.
In the world of residential real estate, the concept of lease options may be unfamiliar. In the real estate world, there are generally regarded to be two options: buying and selling or buying and holding.
The lease option can combine the advantage of buying and selling with that of buying and holding. This system has been known as “rent-to-own” in the past, but this name carries a negative connotation because the industry has at times exploited its customers.
The lease option is an agreement between the investor and the buyer. It includes a lease with a monthly rental fee, but also includes the option to buy the home at any tie. Lease options generally include a rental credit that works to make payments on the home. This could reduce the price that the tenant pays to purchase the home at any point in their lease.
Advantages of Lease Options
With a lease option, the monthly rent can be higher because a portion will be charged back to the investor. The buyer has greater responsibility so they may be willing to take better care of the property. When the deal is constructed properly, the lease option is only in force if the rent is paid on time.
The sales price is fixed with a lease option, meaning that the price of the property is not subject to the whims of the real estate market and to the economy. This can provide a good deal for the buyer/tenant as well as the seller/investor.
Finding the Best Lease Options
The lease option system works similarly in the commercial property arena. The seller and buyer agree on the sales price and contract period, on the amount of monthly rent that will be credited toward the purchase, and on who is responsible for maintaining the property.
The legal sales agreement or contract may include a set price. This price may be a value that is agreed upon or appraised at the time it is paid. The major difference between a lease option contract and a standard property purchase contract is the intention of the parties. Court rulings have found that judges determine whether a lease option is in force based on the intentions of the buyer and seller.
When a lease option is treated like a sale, the rent and option payments during the lease are changed. The property’s ownership transfer is altered, making changes to its tax implications.
The tenant cannot deduct their rental payment on their taxes. However, the tenant is allowed to deduct depreciation on their property. The income tax deduction amounts to a fraction of the payments the tenant makes through the rent.
The landlord considers the option payment a down payment rather than a rental payment. The rental payments could result in gain or loss. The rental income becomes a capital gain. Since the landlord has effectively sold the property for tax purposes, they are not allowed to deduct depreciation or rental expenses on the leased property.
Tenants Benefit from Lease Options
Tenants stand to gain from a lease option. Tenants may be able to contract for their repair expenses to be applied to the purchase price of the property. The lease option also gives the tenant the opportunity to save up for a down payment. The lease could last as long as the landlord wishes. Lease options also help buyers improve their credit situation and make it easier to get future mortgage.
Landlords Also Benefit
The rent-to-own nature of the lease option means that the tenant is more likely to take good care of the property. The lease option fee is non-refundable even if they do not buy in the end.
One disadvantage to the landlord is that they may not be able to secure a high price when they sell, depending on market conditions. It may be that selling a property in the traditional fashion allows a landlord to have more control over the price of the property. However, if the markets go down, the landlord has a ready-made hedge against taking a loss.
Favorable Lease Options
Finding a favorable lease option can be complex, but real estate professionals like David Ebrahimzadeh encourage buyers and sellers to consider this type of sale. When both parties construct their contracts carefully, they may be able to reap significant benefits from this particular payment structure.
Both landlords and tenants need to be aware of the possible tax implications of a lease option, and they need to know how these tax considerations could affect their profits. Doing your due diligence is a must when setting up a lease option.