Larger Down Payment Vs Rent Credit
Morning:
I'm working on my first lease/option. I have been reading my materials from the Cash Flow System (SDI) and A.D. Kessler.
My question is from real life experiences is it better to get a larger non-refundable down payment from the tenant/owner and charge market rent with no rent credit or get a smaller non-refundable down payment and charge above market rent with a rent credit? If one is going to give a rent credit, what percentage do most people give back as a credit?
Thanks in advance for your time
winuinc :-?
Me personally - I would rather get a larger option payment then higher monthly payments. It allows me to leverage better. However - I would still need at least a small cash flow per month on my monthly rent.
[addsig]
I do both. I try to collect as much I can in Option Consideration (usually 5 percent), and I try to collect $200 or more in higher-than-market rent, which I double in rent credit.
LeaseOptionKing,
Run us through a scenario of a house for $200k done as a LO/LP. Show $ amounts as necessary. Explain how giving double rent credit back is still lucrative for the seller. I don't quite follow !
Thanks for the help !
i do both as well.....kenmax
My scenario is I just purchased the property . I planned to make it a rental but I have been approached to consider a lease option. Using the numbers above, would you do anything differently?
Thanks
winuinc
What numbers above? Need more info.
The numbers posted by leadman above.
For my case the numbers are
Purchased for 50K, no money down. 30K + closing costs funded by my IRA. Seller took back a 1st for 20K.
Option Price is 65K.
My expenses are 325.00/month condo fee and 167.00/month interest only payment to seller.
Can rent it for 850.00/month
Outstanding!
Quote:
On 2004-08-11 19:02, LeaseOptionKing wrote:
Typical scenario: I tell the Seller since they now get depreciation on the property they can afford to give me a modest amount of rental credit. I usually ask for a miniscule $200 (that does add up quickly, though). Then I offer $400 in credit to my T/B IF they pay an extra $200 above market rent (doubling their money each month). Getting $200 more in rent is worth the $400 I have to pay later (that I may not have to pay at all), especially for all the benefits (higher rent that helps them qualify for a loan payment, more positive cash-flow for me, and no late rent payments). All of these benefits cost me $2,400 a year, but I would gladly pay it. After all, if I am going to have a large back-end payday, the rental credit helps them to cash me out in 12 months. But guess what? Since I get the other $200 from the Seller, it's a wash at closing, so I get all these benefits free.
<font size=-1>[ Edited by LeaseOptionKing on Date 08/12/2004 ]</font>
How do they get depreciation on the property? Sorry noob to lease options
I've heard the term equitable title thrown around and thought they'd get to write something off for making payments on the house. Do they?
The Seller in this case (the Owner) gets depreciation just as they would for any rental property.
oh oops for some reason I read the buyer gets depreciation. hehe I get it now :D
I wish! Unless you buy sub2, the only tax benefits for Lease Options are regular business expenses and tax write-offs directly associated with running the business.
LeaseOptionKing,
In your "typical scenario" above, you are inserting yourself as a middle man between the Seller and the ultimate tenant/future buyer.
I'm interested in knowing what you are doing as a 3rd party middleman. It sounds to me that you are signing a LO/LP agreement with the current owner, with the ability to sublease and suboption. You get the owner to discount his rent by $200 by showing him he can take a depreciation allowance on the property. You then find a willing buyer for the property, and sublease it to this other buyer, with of course a LO/LP agreement. With this party you charge them $200 over market rent, and give them a $400 credit per month if they exercise their option.
Theultimate renter decides to exercise his option, you exercise your option prior, purchase the property from the seller, then flip it to your buyer.
This is an interesting way to insert yourself into the normal LO/LP transaction.