BUY TO LET MORTGAGE VS CASH BUYERS
Jess Chambers
April 26th 2021
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Everyone’s talking about lease options for buying property, but what exactly are they, how do they work, why would you use one, and why doesn’t everyone use them? Well, in this article we take an in-depth look at lease options for property investment so you can determine whether it’s the right option for you.
It’s a legal agreement, in essence, which allows you to control a property and rent it out, with the right to buy it in the future. It can be quite a bit to get your head around, but it’s actually pretty simple.
It’s an agreement in which you essentially cover the owner of the property’s monthly payments, whilst also sometimes agreeing on a purchase price of the property, and in turn, you can control the property and rent it out to tenants.
These work somewhat similar to a car lease agreement, you agree on a monthly payment with the owner, you agree the length of the agreement or the amount you want to purchase the property for at the end of the agreement and you usually give them an upfront payment, like a deposit.
The upfront payment is an important part, it’s what makes the agreement legally binding – it can be as little as you want, but it has to be in place for the agreement.
From the perspective of a landlord, a lease option makes a lot of sense, you’re essentially looking to agree on a fee with the owner of a property that covers their mortgage, but rent it out at a higher cost, making a profit on the difference.
Why would any property owner agree on that though, surely they could just rent it out themselves? Well, firstly a lot of people don’t want to do that, and the main property owners that agree to do something like this are those who are in negative equity but still want to move from the property.
This can also be beneficial for the owner if they simply want to have the mortgage on a property covered, without having any of the financial strain.
As an investor, the main thing that you need to ensure when you’re making this kind of deal is that it will make you a profit. You have to structure the deal in such a way that the owner of the property will be happy to accept, but you’ll also turn a profit.
The first thing is to figure out what the property you want to have the lease option on is actually worth. Then you need to figure out what comparable properties rent for in the area and the overall mortgage payment the owner is paying.
Now, let’s take for example a property valued at say £200k after your research.
- You agree to have a purchase option of £200k
- You set an agreement of 10 years
- You agree on a payment to the owner of £750 which covers the mortgage
- You then find tenants willing to pay £1,100 a month
- £1 agreement fee
That leaves you with £350 profit per month, you will obviously have to cover maintenance here and there, but the biggest benefit from this as well is that come 10 years’ time, properties often increase in value so not only will you make a profit on the rental period but also the sale value due to having a pre-agreed purchase price.
We can guide you through the lease structuring process. As the UK’s leading property sourcing company, we can help you find investment properties across England and Wales. Join us today!
This is another reason not everyone can get their hands on a lease option, there are only a few circumstances in particular that it might work for both owner and investor.
You can’t just find lease-option deals on the open market or at your local estate agents, you need to actually go out and get them through marketing. You are trying to seek out properties where the owner might be looking to move but is in a negative equity situation or someone close to being repossessed.
There are multiple ways that you can try and find these properties, but most of them are going to cost you a little bit of money. You should perhaps look at things like social media adverts, or advertising in local papers.
Securing a property isn’t easy, so when you do, you want to make sure that you can tie up the agreement fairly quickly.
If you find an owner willing to agree to a lease option and you’re seeing the profits as a landlord, you might think, what could possibly go wrong? There are actually some downsides and risks to lease options that you need to be aware of before jumping in, for both sides.
As an investor, you can run into issues such as if you agree on a price in which the owner will sell to you at the beginning, but later on, they refuse, which can lead to costly legal action. Just like any landlord, there also might be unexpected maintenance or issues with the property, which will eat into your profits – or a tenant refusing to pay, for instance, you’ll still have to cover the costs.
You also might run into other issues with the owner, such as them failing to pay the mortgage, re-mortgaging without notifying you, or being made bankrupt, which will cause issues with the tenants you’ve placed.
Because a lot of people find it a little difficult to get their heads around, it can initially come across as a bit of a complicated concept. It can also be pretty hard to find the opportunities, as mentioned, you will probably need to spend a bit of money on marketing to find property owners who are suitable for and would accept a lease option.
Another reason is that sometimes investors choose to explore other avenues, like for example rent-to-rent, which we touched on in our rent-to-rent guide. At the moment there also isn’t a large number of negative equity properties with the market being so buoyant.
Start your property portfolio today!
Everyone’s talking about lease options for buying property, but what exactly are they, how do they work, why would you use one, and why doesn’t everyone use them? Well, in this article we take an in-depth look at lease options for property investment so you can determine whether it’s the right option for you.
It’s a legal agreement, in essence, which allows you to control a property and rent it out, with the right to buy it in the future. It can be quite a bit to get your head around, but it’s actually pretty simple.
It’s an agreement in which you essentially cover the owner of the property’s monthly payments, whilst also sometimes agreeing on a purchase price of the property, and in turn, you can control the property and rent it out to tenants.
These work somewhat similar to a car lease agreement, you agree on a monthly payment with the owner, you agree the length of the agreement or the amount you want to purchase the property for at the end of the agreement and you usually give them an upfront payment, like a deposit.
The upfront payment is an important part, it’s what makes the agreement legally binding – it can be as little as you want, but it has to be in place for the agreement.
From the perspective of a landlord, a lease option makes a lot of sense, you’re essentially looking to agree on a fee with the owner of a property that covers their mortgage, but rent it out at a higher cost, making a profit on the difference.
Why would any property owner agree on that though, surely they could just rent it out themselves? Well, firstly a lot of people don’t want to do that, and the main property owners that agree to do something like this are those who are in negative equity but still want to move from the property.
This can also be beneficial for the owner if they simply want to have the mortgage on a property covered, without having any of the financial strain.
As an investor, the main thing that you need to ensure when you’re making this kind of deal is that it will make you a profit. You have to structure the deal in such a way that the owner of the property will be happy to accept, but you’ll also turn a profit.
The first thing is to figure out what the property you want to have the lease option on is actually worth. Then you need to figure out what comparable properties rent for in the area and the overall mortgage payment the owner is paying.
Now, let’s take for example a property valued at say £200k after your research.
- You agree to have a purchase option of £200k
- You set an agreement of 10 years
- You agree on a payment to the owner of £750 which covers the mortgage
- You then find tenants willing to pay £1,100 a month
- £1 agreement fee
That leaves you with £350 profit per month, you will obviously have to cover maintenance here and there, but the biggest benefit from this as well is that come 10 years’ time, properties often increase in value so not only will you make a profit on the rental period but also the sale value due to having a pre-agreed purchase price.
We can guide you through the lease structuring process. As the UK’s leading property sourcing company, we can help you find investment properties across England and Wales. Join us today!
This is another reason not everyone can get their hands on a lease option, there are only a few circumstances in particular that it might work for both owner and investor.
You can’t just find lease-option deals on the open market or at your local estate agents, you need to actually go out and get them through marketing. You are trying to seek out properties where the owner might be looking to move but is in a negative equity situation or someone close to being repossessed.
There are multiple ways that you can try and find these properties, but most of them are going to cost you a little bit of money. You should perhaps look at things like social media adverts, or advertising in local papers.
Securing a property isn’t easy, so when you do, you want to make sure that you can tie up the agreement fairly quickly.
If you find an owner willing to agree to a lease option and you’re seeing the profits as a landlord, you might think, what could possibly go wrong? There are actually some downsides and risks to lease options that you need to be aware of before jumping in, for both sides.
As an investor, you can run into issues such as if you agree on a price in which the owner will sell to you at the beginning, but later on, they refuse, which can lead to costly legal action. Just like any landlord, there also might be unexpected maintenance or issues with the property, which will eat into your profits – or a tenant refusing to pay, for instance, you’ll still have to cover the costs.
You also might run into other issues with the owner, such as them failing to pay the mortgage, re-mortgaging without notifying you, or being made bankrupt, which will cause issues with the tenants you’ve placed.
Because a lot of people find it a little difficult to get their heads around, it can initially come across as a bit of a complicated concept. It can also be pretty hard to find the opportunities, as mentioned, you will probably need to spend a bit of money on marketing to find property owners who are suitable for and would accept a lease option.
Another reason is that sometimes investors choose to explore other avenues, like for example rent-to-rent, which we touched on in our rent-to-rent guide. At the moment there also isn’t a large number of negative equity properties with the market being so buoyant.
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