How to maximize your cash flow in your Lease Options
Well for starters it should cover PITI (Principal, Interest, Taxes and Insurance) that you will be shelling out. It is funny to see investors forgetting to include taxes and insurance in their lease payments because:
- They might have prepaid the insurance for the full year at the time of getting the mortgage and forget about it.
- If their taxes are not escrowed then once again they might forget about it at the time of making a payment.
And off course you are sitting and thinking Hey! The property will be gone in one year anyway so lets make the payment as easy as possible.
Noble thoughts! But the problem with dumb idea is that if something is to go haywire and instead of closing on that deal in 12 months – you go an additionally 4 more months then you will get an insurance bill and a tax bill.
Look whether your insurance or taxes are part of your mortgage payment or not – it does no matter and they have to be included in your lease payment.
Also think about it this way – if your tenant – buyer has problems paying you the entire PITI – they how the heck they are going to get qualified on their own 12 months from today to get the whole thing in their name???
They think there income is going to go up?
Yeah! Sure! What if it does not?
Look in your local newspaper what the houses that are similar to yours in your city are renting for? That is comparable #1.
If you have MLS access then do a Quick Search in your city once again for houses comparable to you – typically the first 5-10 listings that pull up are rentals – that is comparable #2.
Call your friendly loan officer and tell them the FICO score of your tenant – buyer plus 30 more points and ask him/her what payment could he possibly get them qualified for the purchase price.
The point being that if your tenant buyer fixes his or her credit in 12 months and you end up flipping the house then you will need them to qualify for that PITI – well lets if their credit was a little better 12 months from today – then would they qualify or NOT?
Exit Strategy That Require a little (gulp!)…
The dirty word in real estate investing in Michigan – WORK – heaven forbid any of us have to lift even a finger to put millions in our bank account. That is for fools! But believe it or not a little preemptive strike actually will work wonders for your lease option flips 12 months from today when you get ready to cash out your backend profits.
1. Get them on Rent Reporters - $89 per month, it is in their benefit to pay that every month, get a good credit line like your lease reporting on their credit report, which is definitely supposed to work wonders. Don’t give them options – be honest – tell them hey I want to help you not to loose your OPTION money.
2. Educate them to get some secured credit cards – these are credit cards that they send out $100 – they get a credit card with a $100 limit. But it reports on all credit bureaus.
3. Get a Credit Builder Report – more on that at a later report and where you can go in Michigan to get one. Very very powerful tool not just for Lease Option players but also for anybody who want to buy and sell foreclosures and comes across buyers who have messed up credit.
It sounds strange right? I mean why should you give a flying ho-ha on what their credit is like? Well do you want your big fat check 12 months from today or NOT? Or if you have already refinanced and pulled all the money already then I am sure you don’t want to keep this house for the rest of your life.
Hence it is imperative that you work out a system in your Lease Option flips where you gently nudge your tenant-buyer into getting their act straightened so they can complete their transformation from tenant-buyer to a homeowner.
The Absentee Landlord Thing:
Apple to apple – you will likely to get less phone calls from your tenant-buyer than your hard-core rentals. Lots got to do with the mindset of somebody who has given you lots of money and may be interested in buying the house from you compared to somebody who is given you little money (security deposit) and looks at your house as temporary residence.
I rented in my flat broke days and I cannot recall a time where I bought anything to make my apartment better. I do recall call the apartment management company couple of thousand times to complain about one thing or another.
Another way is to make a list of things you really don’t want to do – like cut grass, clean the gutters, get a roll of toilet paper their kids just tossed in the can out for them – and offer them an incentive for not calling you.
For example you can add a clause to the Lease Option contract that any repairs up to $50 will be handled by the tenant-buyer or they will do the work themselves, buy the materials up to $50 themselves and once they have given you proof of purchase via a receipt – you will credit $50 to their next month lease payment.
Off course, they can not do anything to the house without your prior written permission.
Trick is you gotta ASK. Most never do – hence they never get anything.
