Becoming a real estate investor doesn’t take a truck load of money. Many successful real estate investors have started for as little at $1,000 and gone on to become millionaires in the investment community. They are an exception to the rule, but it can happen. But I am one of the many investors that is looking at my real estate investing career for my life line to retirement. So I am an investor who looks to get into deals with as little skin in the game as possible. And this is where I like to take advantage of lease-to-own contracts.
What is a lease-to-own contract?
Lease-to-own contracts are normal used by property owners as a way to lease out their property with the intent of selling it in the future. They offer terms to tenants that provide them the opportunity to purchase the home and property in the near future. The contract is drawn up by the property owner and either all or a percentage of the rent payment are applied to the principle of the purchase price. When the tenant is ready, they then purchase the home using bank financing.
How do lease-to-own contracts benefit real estate investors?
The greatest advantage of lease-to-own contracts is that it allows the investor to build equity by paying down the debt on the property. The more equity can translate into a lower percentage rates with bank financing when it comes time to purchase the property. Lease-to-own contracts also allow the investor to check out how well the property fits into their investment portfolio for a few years. If they have issue generating profits under the current contract, then the investor may have an option of dropping the property as long as it is in the contract (which I always make sure that it states). Another reason that investors like lease-to-own contracts is that the terms should always be better than any term the investor can get on standard financing.
How do lease-to-own contracts benefit property owners?
Investors look for owners who are motivated to work these kind of lease-to-own deals. The owner has to motivated to get someone else to start making payments on their home. They may have purchased another home and their old one is sitting vacant. It allows the owner to set a price that may be more favorable to the seller in the beginning. But the investor is going to place a tenant in the property as fast as possible which will start paying down the debt and building positive equity. By the time the first 5 years go by, the investor should have enough equity in the home to finance the remaining balance under favorable terms.
Setting yourself up for success
Real estate investors look for ways to get their properties with little or no money down in the purchase process. Sure there will be cost associated with property maintenance, and smart investors will structure the lease-to-own deal so that they can make a 10% to 20% profit margin through sub-leasing the property. The monthly rent check is continually paying down the property debt and allowing the investor to place cash aside for any maintenance cost that may be needed. Getting multiple properties in your portfolio will help the average real estate investor build financial security for the retirement years with little investment capital.