Is investing with lease options just too risky? Find out in our new video here...

1. their monthly payment. So, what can you do? You can just get
Investing with Lease Options -- another tenant buyer in there.
too RISKY? {new VIDEO} When you did your original marketing you will have had a
bunch of leads of people looking to buy that property. You just
Investing with Lease Options: go back to your initial list, find somebody who was desperate
too RISKY? to get it the first time but just missed out and get them into the
property. What does that mean? That means another down
payment. And it means you've got somebody who can pay the
rent again. If they don't pay the rent and they have to leave,
then it's not the end of the world.
Video transcript
So today we're going to be looking at the risks of investing Investing with lease options: Risk #2
with lease options: a question that was asked by one of our Okay, so, risk number two. This is always a risk with buy to let.
subscribers, Adam. Adam's business partner is wondering: In the case of buy to let what happens? You're the owner so
what is the catch with lease options -- they seem a bit too good you have to pay for any repairs as it says so in the lease. Now
to be true. I know exactly how Adam's business partner feels; with lease options, it's obviously an option to buy the property
that's exactly how I felt when I first encountered lease options. running alongside a standard tenancy agreement. The tenancy
But, what I found is that on the contrary: they're actually a agreement has to say that the investor has to pay for repairs.
lot more secure; less risky than traditional buy to let. And I'm What you find in practice though, is that again because the
just going to tell you why that is the case. I'm just going to tenant buyer has a buyer mindset, they are not going to be
switch over to a presentation here otherwise I'll forget what phoning you about a leaky tap. They will do most repairs
I'm talking about, so here we go. themselves.
Investing with lease options: Risk #1 If for example the property was taken on and the boiler packed
in within a few weeks of them going in there, you maybe want
Okay, so, the first possible risk of investing with lease options to do the right thing and get that fixed but in general, you'll find
that you might think of is rent. What happens if the tenant -- that you will not get maintenance calls from people on lease
or tenant buyer in the case of a lease option -- fails to pay the options.
rent or the monthly payment? So what happens with a buy to
let? Obviously if you've got a mortgage, if the tenant doesn't Instalment contracts -- another variation on a lease option --
pay, then you have to find funds to pay the mortgage yourself often known as delayed completions or long-stop completions.
otherwise you’ll end up defaulting and possibly getting the With instalment contracts, it's totally different again, it's
place repossessed. more similar to a normal purchase and there's no option:
they're bound to buy the property and in that case there's no
What happens when you have a lease option? If you've taken tenancy agreement, in which case, the tenant buyer pays for
an option on someone else’s property and you're selling it on all repairs, no matter what. It's like they have bought the
to a tenant buyer, then you're in a similar situation. Except it's property themselves, so you’re completely covered there. So
someone else's mortgage that doesn't get paid. Obviously, you again, more risk with a buy to let, I would say on that.
have agreed to make the payments on that mortgage so you're
going to want to make sure that they get paid. Just like a buy to
let, you've done your due diligence beforehand and you know
that you've got a decent investment there so you don't want to
let it go.
Now which is more likely is my next question: a tenant
defaulting or a tenant-buyer? Now I would say that with a
lease option, it is less likely that your tenant buyer is not going
to pay the rent. Why is that? Well, the one big reason is that
they have usually put down a large chunk of cash upfront as
a deposit towards the purchase of this property -- often two
or three percent or possibly more -- of the purchase price on
that property. They know that if they don't pay their rent, if
they don't keep up on the payments, they will risk losing that
upfront payment.
Investing with lease options: Risk #3
If it's just a renter in a buy to let then there's a lot less at stake
there. Also, with a lease option, your tenant buyer has a buyer The, the other big risk and certainly for anyone who has
mindset so they're a whole different type of prospect than your more than a couple buy to lets, and doesn't have fixed rate
normal renter. Now we've said it's more unlikely for a tenant- mortgages, the risk of interest rates going up is a big one
buyer to default on the rent. In the unlikely event that they do, and, let's face it, they can't go down that much further at the
what would you do? Your legal paperwork would say that you moment. So, obviously with a buy to let, when interest rates
get the property back; the tenant has to leave if they don't pay go up, your payments go up: you have to pay the payments, or
you get repossessed.
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2. With a lease option, there is less risk of this because, with
a lease option you are, generally getting upwards of twenty
percent more than you would on a buy to let in your monthly
payment. So, that means that there's more room for the
interest rates to move up and the payments to move up, so, the
risk is less.
With an instalment contract, most investors will write into the
contract that the payments rise and fall in line with interest
rates. When interest rates go up, the payment will also go up.
So again, you're completely insulated from any risk on the,
interest rate side. And for that very reason I'm not going to get
any more buy to lets. I feel too exposed to interest rates rising,
and for that reason I'm only going with instalment contracts
or delayed completions because I know that I can build in any
interest rate rise into my risk reversal. So that's another big
risk which is not really present with instalment contracts.
Investing with lease options: Other risks
Now, other risks… At the end of the day, you're a property
investor for goodness sake! If you don't want risks, put your
money in a bank! The there are risks with everything but you're
a property investor, you're no doubt a bit of a risk taker and
there's obviously ways of managing those risks with proper due
diligence, and using the right tools.
Finally, solicitors: that's what they're there for. They do the
legal documents to deal with any other unforeseen risks that
might, come up like people dying or going bankrupt and things
like that.
And then just finally, my mentor, as always is Rick Otton, he's
the guy that I learned all my creative property stuff from. See
you next time.
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