Lease option real estate investing is a creative way to get started in real estate investing. The biggest advantage of this investing method is "control". It basically gives the investor the right to possess-- be in control of-- and profit from a property without owning it.
A lease option contract is a combination of two documents. The lease part is where the owner agrees to let you lease their property while you pay them rent for a stated period of time. During the lease period the owner can not raise the rent, rent it to anyone else, or sell the property to anyone else.
The option part represents the right you purchased to buy the property in the future for a specific price. If you decide to exercise your option to buy, the owner has to sell it to you at the negotiated price. The option part of the contract obligates the seller to sell to you during the option period- but it does not obligate you to buy. You are only obligated to make rental payments as agreed during the lease period.
When the lease option contract is written and structured properly, it can provide tremendous benefits and advantages to the investor. If the lease option includes the "right to sub-lease" the investor can generate a positive cash flow by renting the property to a tenant for the duration of his lease, or lease option the property to a tenant-buyer for positive cash flow and future profits. If the lease option includes a "right of assignment" the investor could assign the contract to another buyer for a quick profit.
Lease option real estate investing, is a flexible, low risk, highly leveraged method of investing that can be implemented with little to no money.
High Leverage
It is highly leveraged because you are able to gain control of a property and profit from it now--even though you don't own it yet. The fact that you don't own it also limits your personal responsibility and liability. Only if you decide to purchase the property by exercising your "option to buy" would you take title to the property.
Little to no money
The investor's cost to implement a lease option agreement with the owner requires little to no money out of pocket money because it is entirely negotiable between investor and owner. There are a variety of ways the option fee can be structured such as an installment plan, balloon payment or other agreeable arrangement between both parties. The option fee can even be as little as .00. In order to secure the property for purchase at a later date, tenant-buyers typically pay a non-refundable option fee of approximately 2%-5% of the negotiated purchase to the seller. Depending on how the lease option agreement is written and structured, the investor could possibly use the tenant-buyer's option fee money to pay any option fee owed to the owner.
Flexible
It is a flexible method of real estate investing because terms of the agreement like payment amounts, payment dates, installments, interest rate, interest only payment, balloon payments, purchase price and other terms are all negotiated between seller and buyer. Responsibilities of both parties are also negotiable. For instance, if the investor doesn't want to act in the capacity of a landlord, he could specify in the lease option agreement that tenant-buyer will be responsible for all minor maintenance and repairs and the original seller will remain responsible for any major repairs.
Financially Low Risk
It is low risk financially. If the property fails to go up enough in value to make a profit, you have the purchased the right to change your mind and let the "option to buy" expire. Even if your tenant-buyer decides not to buy the property, you have profited by a positive monthly cash flow from the tenant-buyer's rent payments and upfront non-refundable option fee.
Let's look at an example of a lease with option to buy structured in a way that the investor profits in 3 separate phases of the investment.
Profit #1 non-refundable option fee
Future sales price negotiated with the current owner is 5,000 with an option fee of 2% of the sales price. Option Fee you owe the owner is ,500. The future sales price you set for your tenant-buyer is 5,000 and the option fee is 4% of the sales price. Option fee the tenant-buyer owes you is ,200. You collect ,200 from tenant-buyer and pay ,500 to the owner and your profit = ,700
Profit #2 cash flow from monthly rental payments
The Monthly rental payment you negotiated with the owner is ,000. You set the monthly payment at ,250 per month for your tenant-buyer. Each month you collect ,250 from your tenant-buyer and pay the owner ,000 each month. Your profit is 0 monthly positive cash flow during the lease period.
Profit #3 is set up when the lease option contract is initially written
The difference in the negotiated future purchase price with the owner and the future purchase price set for your tenant-buyer. Let's say the property goes up in value to appraise for at least 5,000. Your tenant-buyer decides to exercise their option to buy. You buy the property from the owner at 5,000 and then sell it to your tenant-buyer for 5,000. 5,000 - the 5,000 you pay to the owner = ,000 profit.
Of course the key to making lease option real estate investing work, is finding motivated sellers and buyers. Finding these motivated sellers and buyers shouldn't be difficult. The continuing down turn in the real estate market has created a large number of sellers who can't sell their property and also buyers who can't get financing to buy. The seller could possibly get a fair offer to be paid in the future by selling their property to a real estate investor on a lease option basis. A potential tenant-buyer could obtain home ownership without having to qualify through traditional home loan guidelines.
One disadvantage of lease option real estate investing involves the tenant or tenant-buyer possibly defaulting on monthly rental payments. This would make it necessary for the investor to come up with money out of pocket to pay the owner and possibly have to proceed with eviction process. However, there are certain provisions and clauses that can be written into the lease option to deter buyers from defaulting on payments.
If the investor fails to do "due diligence" before entering into a lease option agreement, he could end up with a property that is unmarketable. There could be a number of liens on it, issues involving ownership of the property or it might be in foreclosure. By diligently performing research before entering into a lease option agreement, the investor can avoid these mistakes. A few things the investor could do is-- perform background and credit checks on both the seller and buyer, search public records in reference to ownership and property status, or do a title search.
Despite the few disadvantages, lease option real estate investing continues to be an excellent way to invest in real estate with little to no money and low financial risks. It also remains to be an excellent way to gain control of a property you don't own and create positive cash flow and profits on flexible terms.
Bottom line, the secret to success in today's challenging real estate investing market is to use only the best creative ideas, proven tools and strategies that have been successfully used by other investors to generate cash flow and profit from today's real estate market. The more you understand and apply now, the more you will profit from today's financial crisis.
Showing posts with label Disadvantages. Show all posts
Showing posts with label Disadvantages. Show all posts
Friday, July 27, 2012
Thursday, June 7, 2012
Advantages And Disadvantages Of Income Protection Insurance
Income protection is a type of insurance that is often misunderstood in the UK. As with other types of insurance there are many advantages and disadvantages to having a policy, and here we list a few of them.
First, let's explain a little about income protection. This type of insurance will replace part of your income tax free if you cannot work because of accident, sickness or unemployment. There are many different types of policy, most of which can be adjusted according to your individual circumstances.
Advantages
Income protection can cover up to 70% of your mortgage. This could work out to be significantly more than the government would pay you in benefits.
Some long term policies offer cover until retirement age. This means that if you suffer a long term illness, you will receive your benefits either until you can return to work or until the age of 64.
The money can be used however you please. Most people choose to cover their mortgage, bills and other financial commitments, but it could be used for general lifestyle costs.
The policy can be tied into a particular debt, like a mortgage or credit card repayments.
You can choose cover for accident and sickness only, accident, sickness and unemployment, or unemployment cover only.
Unemployment cover could offer back to work schemes and training to help you find a new job.
Income protection can be designed to kick in only after your sick pay stops, so your premiums are lower.
Disadvantages
Unemployment cover will only pay out for a maximum of 12 months, even if you haven't found a new job within this time.
Accident, sickness and unemployment policies usually only offer 12 months of benefits as well. Long term-policies offer better cover, but are sometimes more expensive.
Pre-existing conditions may not be covered on your policy, so it is important to take one out before you need it.
Similarly, you will not be covered for redundancy if you already knew there was a chance it was going to happen. This protects the insurance companies against people taking advantages of the policy.
Smokers will usually pay higher premiums for accident and sickness cover because they are more likely to fall ill.
It is important never to buy a policy without researching the market first to get the best deal; otherwise you could be paying more than you need to.
Now you know the advantages and disadvantages, it is up to you to decide whether income protection is right for you!
First, let's explain a little about income protection. This type of insurance will replace part of your income tax free if you cannot work because of accident, sickness or unemployment. There are many different types of policy, most of which can be adjusted according to your individual circumstances.
Advantages
Income protection can cover up to 70% of your mortgage. This could work out to be significantly more than the government would pay you in benefits.
Some long term policies offer cover until retirement age. This means that if you suffer a long term illness, you will receive your benefits either until you can return to work or until the age of 64.
The money can be used however you please. Most people choose to cover their mortgage, bills and other financial commitments, but it could be used for general lifestyle costs.
The policy can be tied into a particular debt, like a mortgage or credit card repayments.
You can choose cover for accident and sickness only, accident, sickness and unemployment, or unemployment cover only.
Unemployment cover could offer back to work schemes and training to help you find a new job.
Income protection can be designed to kick in only after your sick pay stops, so your premiums are lower.
Disadvantages
Unemployment cover will only pay out for a maximum of 12 months, even if you haven't found a new job within this time.
Accident, sickness and unemployment policies usually only offer 12 months of benefits as well. Long term-policies offer better cover, but are sometimes more expensive.
Pre-existing conditions may not be covered on your policy, so it is important to take one out before you need it.
Similarly, you will not be covered for redundancy if you already knew there was a chance it was going to happen. This protects the insurance companies against people taking advantages of the policy.
Smokers will usually pay higher premiums for accident and sickness cover because they are more likely to fall ill.
It is important never to buy a policy without researching the market first to get the best deal; otherwise you could be paying more than you need to.
Now you know the advantages and disadvantages, it is up to you to decide whether income protection is right for you!
Tuesday, May 22, 2012
The Advantages And Disadvantages Of Refund Anticipation Loans
Advantages:
1. Instant Cash
If you are low on cash and cannot wait for your refund to pay off some bills, a refund anticipation loan could certainly fill that role. While cash advances on a paycheck could pay for small bills that are due very soon, if you have a larger sum to pay off and no other way to do so, a refund advance loan could be very helpful.
2. Short Processing
As opposed to other large loans, a refund anticipation loan has a short application and approval process. Normally processing will take no more than a day, and the loan can be distributed within 24-48 hours. In comparison, traditional loans can take weeks to be approved and distributed.
3. No Tax Prep Fees
Usually if you decide to get a refund anticipation loan the tax preparer will deduct the cost of their services from your refund. This can be a great option for those who might not otherwise be able to afford the fees associated with professional tax preparation.
Disadvantages:
1. Interest and Fees
Unfortunately, the interest ad fees associated with these types of loans can be quite high. This is mostly due to the fact that the loan itself does not come from the preparers handling your taxes. Although you typically apply for and receive the loan through at a tax preparer's office, they almost always outsource to third party lending banks.
2. Payment Responsibility
Like with any loan, you are ultimately responsible for repaying the bank for the money they lent you. Therefore, if for any reason the lending bank does not receive the amount the full amount of your refund from the IRS then you will be held responsible for the difference.
3. Lack of Loan Education
Unfortunately, hundreds of people take advantage of refund anticipation loans every year without fully understanding their options. As with any major financial transaction you always want to carefully consider the pros and cons before making a decision, and when it comes to refund anticipation loans if you do not need the funds right away then you would probably be better off waiting for a check from the IRS.
1. Instant Cash
If you are low on cash and cannot wait for your refund to pay off some bills, a refund anticipation loan could certainly fill that role. While cash advances on a paycheck could pay for small bills that are due very soon, if you have a larger sum to pay off and no other way to do so, a refund advance loan could be very helpful.
2. Short Processing
As opposed to other large loans, a refund anticipation loan has a short application and approval process. Normally processing will take no more than a day, and the loan can be distributed within 24-48 hours. In comparison, traditional loans can take weeks to be approved and distributed.
3. No Tax Prep Fees
Usually if you decide to get a refund anticipation loan the tax preparer will deduct the cost of their services from your refund. This can be a great option for those who might not otherwise be able to afford the fees associated with professional tax preparation.
Disadvantages:
1. Interest and Fees
Unfortunately, the interest ad fees associated with these types of loans can be quite high. This is mostly due to the fact that the loan itself does not come from the preparers handling your taxes. Although you typically apply for and receive the loan through at a tax preparer's office, they almost always outsource to third party lending banks.
2. Payment Responsibility
Like with any loan, you are ultimately responsible for repaying the bank for the money they lent you. Therefore, if for any reason the lending bank does not receive the amount the full amount of your refund from the IRS then you will be held responsible for the difference.
3. Lack of Loan Education
Unfortunately, hundreds of people take advantage of refund anticipation loans every year without fully understanding their options. As with any major financial transaction you always want to carefully consider the pros and cons before making a decision, and when it comes to refund anticipation loans if you do not need the funds right away then you would probably be better off waiting for a check from the IRS.
Subscribe to:
Posts (Atom)