If you were asked the question: “Can I rent your property on a long term lease for 4-6 years and then have the option to buy it?” What would you say?
This is the question that a number of property investors are currently asking. The correct term for this kind of deal/offer is ‘Lease Option’
You may have come across the term ‘Lease Option’ before and wondered exactly what it is?
The basis of a lease option is to find a solution to a problem both for the landlord and the property investor but rather than trying to find a quick overnight (or short term) solution, it looks at a longer term solution with entry and exit T&C’s.
Examples of some lease option problems and solutions are:
Property Problem 1
Problem/Scenario: Landlord has a property that they wish to rent out, (in typical landlord style) for as long as possible with no voids. In the ideal world, landlords want a guaranteed rental income and to make a profit on their investment.
In this scenario, the landlords have the added problem that they keep letting to tenants who only want short term tenancies, then after 6-12 months the tenant leaves and the landlord either incurs void periods, turn around costs and advertising costs. On top of all this, they also have to pay the mortgage on the place!
Solution: The answer to this problem may be to let another property investor rent the property from the landlord on a guaranteed long-term rent basis. The guaranteed rent being less than they would be getting from a ‘regular’ tenant but with the benefit that it is guaranteed for a number of years regardless of being occupied or not.
This solution makes the landlords’ happy as they still get rental income, get to keep the asset and make a profit. It also makes the property investor happy as he makes a profit renting the property out for a number of years at a guaranteed lower rent.
The solution would have to involve a clause regarding maintenance, repairs and compliance laws & regulations on the property.
You may think this solution sounds like a letting agent but there are a few significant differences. 1. Guaranteed rental income 2. NO letting fees. 3. No additional insurance fees as the property investor would cover those costs.
Property Problem 2
Problem/Scenario: As in problem 1. The landlords’ has the problem that they are struggling to let the property added with the fact that they don’t live local to the property and haven’t a lot of time to deal with it. The property is actually becoming a cost rather than an investment as they are left paying the overheads of owning a property to let. So much for a property investment!
Solution: Combining the solution with problem 1 (another property investor takes over the rental of the property on a long term option but with a reduced rent) and adds a clause into the agreement that the property investor will purchase the property at the end of the agreed rental/lease period for an agreed amount of money (usually market value at time of agreement).
In this solution the property owners are happy as they get a guaranteed rent for a number of years as well as a sale for the market value of the property.
The property investors are happy as they get the chance to have a number of years making a profit on rental income and as well as having time to get a BTL mortgage and deposit into place. They may even make ’balance sheet’ profit on the increase in the property’s value by the time they come to buy it.
This solution is especially good for landlords with several properties as they potentially can sell the properties in different years therefore not incurring as much capital gains tax.
Property Problem 3
3. Problem/Scenario: Your house has been on the market for quite a while now and you are unable to sell it. You want to move on in your life but until you sell, you can’t!
The house is a weight around your neck, dragging you down and you can not shake it off. Sound familiar to anyone?
Maybe you are in NEGATIVE EQUITY? Can’t Afford the mortgage payments?, Paying the mortgage payments on your credit card? Think you have made a massive mistake buying the house in the first place?
Maybe you have tried to:
- Sell it privately,
- Used an estate agent to try and sell it,
- Reduced the asking price,
- Considered taking part exchange,
- Approached a ‘Buy your house today’ broker.
Solution: There are a number of different options for you here, it depends on the amount of equity (or not as the case may be) that is available in the property.
- One option involves you selling the property BMV (below market value) quickly and effectively. This can be done in 3-4 weeks.
- Another option is to ask the mortgagee if you can rent out the property(consent to rent). They will probably increase the mortgage rate to allow this and turn your mortgage into a Buy To Let (BTL) mortgage. In this option you can rent out the property but still keep the asset and the any equity within the property.
Dealing with residential mortgages are usually more complicated than dealing with existing commercial or buy to let mortgages but there may still be a solution available to you. It may just involve some more experience, processing and fees (which the property investor would pay).
Can you relate to this article ?
Do you have a property that is dragging you down both financially and mentally?
Would you like to chat to someone about it to see if anything can be done to help?
A free service is available to all registered users (free to register) of Private Landlord Directory. All you have to do is click the link Renting and Selling Property SOS, fill in the form and they will contact you.
No obligation, 100% confidential and completely FREE.
You have nothing to lose and you may have just found the solution to your problem.
The number of renters has soared as mortgage lenders have tightened up borrowing by demanding larger deposits and tighter restrictions imposed on lending.
A squeeze on finance has also put a brake on buy to let borrowing, with much of the market activity generated by remortgages rather than buying more homes and buying new houses. New homes property developers are now having to offer exceptional deals including 100% home exchanges as potential customers are holding out on moving.
The report forecasts a massive 20% increase in rents over the next five years, as the number of rental properties is soaked up by increasing demand.
Around 4.8 million privately rented homes generate £48 billion of rental income a year, says the report, which will soar to £70 billion by 2016 if the predictions prove correct.
“We expect a 23% increase in the number of private rented households, which is about 1.1 million extra homes,” said Cook (Lucian Cook, director of Savills research) “That’s an idea of the scale of opportunity for institutional investment.”