Why would someone give me control of their property for 5 years ie. lease/option it to me. Make no cashflow out of the property other than my premium and unable to sell the property for another 5 years because of my option? [xx(]
Hi Polaris,
I personally wouldn’t do a lease/option for 5 years. I would do it for 2 years with say 3 option renewals giving a total of 6 years, but the price and rent is changed with each renewal and a new fee is paid. This way I would guarantee myself of good returns.
When you say “make no cashflow out of the property other than my premium”, I assume you mean the option fee? Yes that is true, money is made on the fee but the whole idea of doing wraps or a L/O is for cashflow. I gurantee you the investor is making money every week.
Cheers,
Mathew.
Hi Mathew,
I am trying to understand why someone would hand over control of their property to me as part of my sandwich trade given they will only receive maybe 1K straight up from me as my option premium and not receive any benefit from the property for a couple of years until the trade is exercised. [xx(]
In regard to what the property owner gets as a kick back from writing a lease/option. It is often the case where the option premium is greater then the 1k you suggested and around the 3-5 thou range. Also it is common to make the strike price (purchase price for leasee) around 10 – 20 % higher then the investors purchase price, thus giving 2 forms of cashflow.
I also know of people paying higher rents as to make the property a positive cashflow for the investor but the higher rental premium going to reduce the strike price for the tenant.Basically this is structuring the deal with the end and exist in mind. Basically you are correct in that it ties the property up but it does help plan and set the investors exit strategy upfront.
Cheers
Pete…Beware of the dreamtakers…
I agree with Willi
I do 5 years leases with an option to purchase anytime – the strike price is set at 20% more than market price and this decreases like a PI loan (tho more slowly)(I now think this may be too generous). I get a option fee upfront of $3000 to $4000 and get about 40% more rent than market value. This generates a good +ve cashflow and a capital gain when they cash me out. If they move out, the lose the option fee and I get to keep the house and do it again at higher rates.
So if you want to do a sandwich option you could find someone like me, take an option on their property and then you sell an option at a higher price with higher rent and a higher strike price.
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
here is another angle on Options.
A client of mine bought a rental property about 2 years ago for $228K. A developer has purchased an option for this property with a strike price of $1mil. Epxiring in one year. He has options on a number of houses in a row, and has submitted DA approvals etc to council for some big units for the site. This developer has aparently already sold the whole lot to another developer and has made about $9mil profit. And he doens’t even own it yet!
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Mathew,I am trying to understand why someone would hand over control of their property to me as part of my sandwich trade given they will only receive maybe 1K straight up from me as my option premium and not receive any benefit from the property for a couple of years until the trade is exercised. [xx(]
No offence Polaris, but did you even read my post?
If I did a lease option to you, you would be paying the following:– $3,000 – $5,000 for the option fee to be rebated from the strike price
– Approximately 20% (depending on the length of option) above my buy price as a strike price to be exercised any time during the option period
– Between $50-$100 per week above my weekly payment (depending on the deal and also market rents) of which a portion will be rebated from the strike priceSo you see, I am making money in 3 ways from day 1 until the day you excercise the option. And if you don’t take your option, I keep everything as rent and do it all over again.
Mathew.
P.S This works exactly the same on a straight L/O or a sandwich L/O.
Hi Mathew,
No offence taken. It is always difficult to put things in words and have another person understand the intent particularly when you are a novice like me.
OK. I see that there is a rule of thumb happening here regarding the option premium I would pay for a property.
Is the premium calculated based on a percentage of what would be gained in rent over the period of the option or is there some other formula for working out the premium?
In my opinion the premium charged is simply up to the vendor/invesor..
Some people might work off a formula – if any of you are out there please enlighten us…
…Beware of the dreamtakers…
Polaris I think I know where you are coming from. Is this is what you are trying to ask?? Why would someone lease option a property to you when they are not getting anything out of it?? they get an option fee, no growth as you have an option over the property & the repayments you are making back to them would be less then or equal to there repayments to the bank. If they did own the house outright they would only be recieving about a 5% return. Why wouldn’t you just put your money in a fixed term deposit. Am I on the right track polaris. I can then LO to someone else and make good profits but how does the other person win?
Hi insider,
Yes, this is what I am trying to establish. the whole point to property trading whether it be thru’ L/O sandwich’s or wrapping is to have a win/win/win situation.
Personally I see L/O sandwich’s as the way to go for the property trader as your working capital and loan liabilities are nowhere near as large on a property to property basis.
But like any joint venture – and that is what property trading is – everyone has a reason for being in the arrangement.
So, why would someone give me control over their property, either one of their IP’s or their primary residence for say 2 years. What are the advantages to the property title owner?
Knowing exactly what these reasons are will show me how I can market to these people as part of the process of setting up a deal.
Doing a lease/option like any other investment opportunity is not about the property (or stock) itself its about the cash on cash return…
Andrew secures a 3 bedroom property on a large block just outside of Geelong (Victoria) for $80,000. The property was purchased vacant but previously rented for $170 per week.Andrew ran a classified ad to attract people who would be interested in the idea of a ‘rent-to-buy’ program.
Sharyn and Adam answered the classified ad and said they’d like to own a home but didn’t have the required deposit and as such could get finance through a bank. They mentioned that they currently pay $200 per week in rent.
After pre-qualifying them, Andrew presented Sharyn and Adam with the following ‘lease-option’ deal:
Rent of $192.50 per week
A lease term of 5 * 5 years (25 years in total)
$2,000 ‘Option Fee’
Option price of $96,000
Andrew’s nett costs are:Deposit (20%) = $16,000
Less Option Fee Received = ($2,000)
Plus Closing costs – inc. legal fees = $5,000
Total = $19,000
We also need to consider Andrew’s cost of finance too. He would seek a 25-year loan for $64,000 (80% of his purchase price) at let’s assume an initial five-year fixed interest rate of 6.4%. His principal and interest loan reayments would be $5,128 per annum.The rent that Andrew receives is $10,010 ($192.50 * 52). His cash on cash return is:
(Annual Income – Loan Repayments) / (Deposit + Closing Costs – Option Fee Received)
= ($10,010 – $5,128) / ($16,000 + $5,000 – $2,000)
= $4,882 / $19,000%
= 25.69%**taken from https://www.propertyinvesting.com/strategies/lease-options
THATS A 26% RETURN GAURANTEED (like all investments does have risks though)- WHICH BANK IS OFFERING THAT AT THE MOMENT
So its not about the house itself, its about how much you invest in relation to the income recieved. The house is just the vehcile used in this lease/option.
Pete
…Beware of the dreamtakers…
Another thing…
About 5 or so years ago the then CEO of General Motors – one of the biggest companies in the world said (something along the lines of):
“WE ARE NOT IN THE MOTOR VEHICLE INDUSTRY, WE ARE IN THE LENDING AND FINANCE INDUSTY”
If one of the most successful companies in the world believe that they make there profit from doing lease/options on their vehicles….this has to say something…about the fact that is all about the income and retun not the asset(vehicle)
Pete
…Beware of the dreamtakers…
I still don’t think you guys understand what Polaris is trying to say. I have no doubt that on selling on a LO is profitable.
I think think this is what polaris is trying to say.
Example.
You find house worth 220K.
You then not buy the house but LO it paying the owner a premium 2-5K and pay him payments each week. Now how is the vendor winning. If he doesn’t own the house he has negative cash-flow and doesn’t win as you have a 5 year option which cuts him out of the appreciation. If does own it he may only recieve 5-6% PA which is not a hole lot better then a bank account.
You can then LO the house with a higher strike and recieve higher weekly payments but where does the original owner win. lose/win
Hi Polaris (and Insider),
I had a spare half hour so I thought I’d come online and answer a few posts. [:0)]
Why would someone give me control of their property for 5 years ie. lease/option it to me. Make no cashflow out of the property other than my premium and unable to sell the property for another 5 years because of my option?
In a lease-option there are two ways that you stand to make money as an investor.
Capital Gain
First you make (and lock in) a potential capital gain, which is the difference between your nett purchase price and the nett option exercise price you offer your client.
So, using Insider’s example of a $220k house, you might offer to sell it for say $250k on a lease option. This is the price struck at day one, and as such it doesn’t matter if the option is exercised day 1 or day 1,300 – the base remains $250k.
Positive Cashflow
The second way to make money in a lease-option is the positive cashflow arising when your rent received is greater than outgoings.
In the case of a $220k property, you’d probably be looking to receive about $330 – $360 per week as a rental in order to earn a decent positive cashflow return.
Limitations
The limitation in all this is the market rent. If the rents in the area you invest are say $250 per week, then trying to make paying $330 per week under a lease-option come out in a win-win way might be tough.
You find house worth 220K.
You then not buy the house but LO it paying the owner a premium 2-5K and pay him payments each week. Now how is the vendor winning. If he doesn’t own the house he has negative cash-flow and doesn’t win as you have a 5 year option which cuts him out of the appreciation. If does own it he may only recieve 5-6% PA which is not a hole lot better then a bank account.
The vendor ‘wins’ as such if s/he earns a +ve cashflow return. I agree, with a -ve cashflow outcome and a locked in capital appreciation, it makes no sense to use a lease-option in these circumstances.
That’s why it’s important to let the circumstances of the deal set the strategy that you adopt, rather than trying to adopt one strategy for all circumstances.
Has this helped?
Have a great night,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi all,
Would a good reason for someone to hand over control of their property be :
1. Bank is about to foreclose. By optioning the property at current MV, the owner has a better chance of receiving any equity in the property but 2 years down the track and the bank is happy as the loan is being paid.
2. If owner has maxed out LVR and needs to sell. Selling thru’ traditional means considering all closing costs involved ie. agents fee for example, owner will end up in the red. If an option is placed over the property the owner has a good chance of retaining what little equity the is, save on fees and receive a nice cheque from the premium.
Also, why would the going rents in the area have a bearing on what your T/B pays. The benifit to them is the fact they are now living in what is potentially their new home.You have given them that chance. The critical factor is that they can afford to pay the rent. This is the investors duty of care to ensure the deal works for everyone.
I personally don’t think in Steves example that it would be tough to market when rents are $250 and LO payment is $330. I have a friend and no many others that wrap houses that are worth 200K+. rentals in the area are about $220 PW. Wrap repayment is $360. People know that to own their own home the repayments will obviously be higher then their rent.
Hi
I think what Polaris in refering to is a senario whereby there are three people involved in the deal, the Owner of the property (the vendor) the investor (polaris) and wrapee.
cya
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