Out of all of the different property investment options, we are often asked whether a Purchase Lease Option is a good idea. This is because most would-be investors know it involves quite a lot of work, a good understanding of the strategy and the experience to negotiate the contract to the most favourable deal.
The answer to the question is not exactly straightforward, as there are a number of dependencies that will determine whether a Purchase Lease Option is in fact, a good idea. For some people, a Purchase Lease Option is a great way to succeed and make profits through property.
For others, it can turn into a regrettable decision, so we will help you to decide whether it would be a good option for you, by highlighting the pros, cons and the skills you will need to make sure it is not a decision that you come to regret.
For a property investor, a Purchase Lease Option provides a huge range of possibilities when you are able to find the right type of deal.
- Finding the right type of property owner (one who needs a solution to their property problem).
- Finding the right type of property (one that is set up to yield a successful rental profit).
- Negotiating a contract agreement that is suitable for the property owner, while providing you with a profit generating property strategy.
Advantages of a Purchase Lease Option
The main advantage of a Purchase Lease Option for an investor is that you have great flexibility regarding whether you want to purchase the property. You are able to rent the property out under the terms of the lease arrangement and then you have the option to buy the property.
2. Potential equity
If the value of the property increases, the investor is able to buy the property at the agreed price with equity, making it a very attractive proposition. If the value of the property decreases, or does not increase very much, the investor does not have to purchase the property at the end of the lease contract.
3. Income through rent
During the time that the investor is renting the property out, they should be able to make monthly profits that will add up to a sizeable sum over the period the lease is agreed over. The investor must be able to arrange a contract that enables them to make a profit after they have paid the landlord their monthly fee, plus any other costs.
4. Less financial commitment than a mortgage
One of the top reasons that investors choose a Purchase Lease Option rather than buying their own property to rent out is because it is less of a financial commitment than taking out a mortgage over a long-term number of years. Instead, they can have a Purchase Lease Option that lasts 3-5 years and they only have to put a minimal amount of money down, with no deposit or interest to pay.
Disadvantages of a Purchase Lease Option
1. Difficulty of finding a landlord for a Purchase Lease Option agreement
The biggest problem with Purchase Lease Options is that they are usually quite difficult to find. You rely on the fact that a landlord is struggling with a property, either because they have vacant periods without any tenants, or they spend too much on maintenance or the tenants are constantly contacting them.
Finding this type of landlord is not always easy, as most property owners who are in the situation where they no longer want to be a landlord will simply sell the property. There will usually be a specific reason why they are unable to just sell the property, such as being in negative equity or the property won’t sell for the value that they are looking for.
2. Lots of research required
Once you find a landlord that is likely to agree to a Purchase Lease Option, you need to run through the figures to make sure that you will be able to generate the required profit to make it worth your while.
So, you need to accurately calculate how much you will need to agree to pay the landlord and how much you will be able to command as a monthly rent fee. Details such as the size of the property and the location will be important in working out the demand for rented properties and the average rent fees for similar properties in the area.
Doing the work involved to ensure you have accurate calculations can be quite time consuming, as you will need to conduct a lot of research.
3. Risk of not making enough money
The best way to approach a Purchase Lease Option is to consider it as a way of renting a property out without needing to buy the property. Therefore, this is the calculation you need to make work in terms of profit, rather than thinking about the profit you could make through equity if the property value increases.
If you find yourself with a property that is not making enough money, either through voids where the property is empty, or paying out too much on repairs and maintenance, the Purchase Lease Option could be a bad financial decision.
4. Requires good negotiation skills
One of the really important parts of the process is to be able to negotiate a contract with the landlord that it financially worthwhile for the amount of work you put in. The landlord will want you to pay them at least enough to cover their mortgage and any other expenses they have for the property.
Obviously, you want to make as much money as possible, so you want to pay the landlord as minimal an amount as you can, so the art of persuasion and highlighting how hassle-free the agreement will be for them, is essential. You also need to try and negotiate a minimal sum to secure the option to buy, which legally can be as little as £1 to make it legally binding.
As you can see, there are lots of different factors that will determine whether a Purchase Lease Option is a good idea for your specific situation.
Are you confident with negotiating with landlords?
Do you have the skills and knowledge, or contacts, to find the right Purchase Lease Option opportunities?
Would you still be happy with the arrangement if the property value does not increase and you choose not to purchase the property?
Is a Purchase Lease Option the best strategy to invest your efforts into with regards to your available options?
If the answers to these questions are yes, then a Purchase Lease Option is very likely to be a good idea!