In this blog I'm going to share with you why lease options work best in a recession. How you can gain cash flow and equity growth from property you don't even own. I've been investing in property for 25 years, and Lease Options are one of my favourite strategies, why? Because they work really well. It doesn't matter if you're a new investor or an experienced investor, Lease Options can work very well for you, and they can be used with every single strategy. But let me cover in this blog why Purchase Options and Lease Options are the best strategy during recessions.
The Recession & Its Affect on Property Investing
Let's think about what happens in a recession. What normally happens is that the market contracts, people stop spending money. People are worried, they want to conserve money, they're not investing. So less people are buying properties. They're worried about the market coming down, but there are still people who need to sell their properties. They want to get away from the hassle of managing, they want to get away from the responsibility of the mortgage.
By using a Lease Option you basically come in and say “I will take over your property for you. I will look after the tenants. I'll do all the management. I'll look after all the maintenance. I'll even cover your mortgage for you. You could go away and forget about this property. Then at some point in the future, normally three, five or even seven years in the future you've got the right to buy that property. Now, it is very important that we fix the property price today because it means that potentially you can benefit from capital growth as the market grows.”
Now, I think most people expect in a recession, that we will see property prices come down. So it's not going to be just an Option for a year, you need at least three years, or ideally five or seven years time. In that time, although the market might come down, you're going to have time for the market to recover. So you as an investor you could lock in a price today. You're not buying it now. What that means for you is you don't need to find your typical 25% deposit to buy the property. You don't need to be able to get a mortgage now to be able to get cash flow from this property, because you're not actually buying the property now. You've got the option to buy it in the future. That means you've got the right to buy if you want to, but not the obligation to do so.
Now why on earth would a landlord agree to that? We're finding someone who's got a property, they just don't want the property, they don't want the hassle anymore. If you can take away the hassle from them and give them a price that works for them, they might be very happy with that. If they just sold the property, if they could sell the property, maybe they can't sell right now, but if they could sell the property and just put the money in the bank, they're not really going to get a very good return from that. So you can actually give them more money by offering them the full market price, whereas right now most people might want to buy at a discount. You can give them the full price in the future. As well as covering their mortgages, you might give them a little bit of profit each month, which is more than they would get if they just sold and put the money in the bank. So they can't actually sell right now, but even if they could they'd be worse off than the deal you give them. That's really important.
An Ethical Win-Win Solution for You & the Property Owner
Whenever you're structuring a lease option, it needs to be a win-win for you and the owner of the property. Otherwise you shouldn't do the deal. Now, the problem with Lease Options is most people don't really understand how they work. They don't structure them the right way, and they're trying to get the best for them, and they don't really think about the seller. What I suggest you do is put yourself in the shoes of the seller and understand their circumstances. Very often you'll find in a difficult market, where we're in a recession, there aren't that many people looking to buy properties. This might be a property they're just frustrated with, maybe it's the other side of the country. They've got hassle to manage it, or maybe they've got a letting agent who's not done a very good job. Maybe they had bad tenants. And maybe they're not getting paid rent on the property. So every month they're forking out, they're losing money. They're haemorrhaging money on this property, and you come and offer to cover the mortgage for them and cover all the payments.
What that means is that actually they're going to be in a much better position because you've helped them. If you help them now, and give them the solution to their problem, they're going to be far more willing to give you what you want. So done in the correct way a Lease Option could work very well for the owner because they get to walk away from the pain, they walk away from a hassle, someone else is looking after the property and paying the mortgage for them. They can get on with their lives. It's great for you, because what you pay the owner should be less than you rent it out for. So you can make profit on a property that you don't even own.
“So it’s really important to understand how they benefit and how you can also benefit as well.”
Lack of Alternatives for Sellers
As there are not that many buyers in the market when there's a recession happening, when prices are coming down, the sellers don't have many alternatives. This alternative is much better than them sitting there with an empty property, or a property they've got bad tenants in. Now, obviously if you take a property on, you want to make sure you can fix the problem. There's no point in you inheriting a problem. Maybe it's because they're a distanced landlord, they're just not close enough to keep an eye on the property and manage it properly. Maybe there's some tenants that need evicting, and once they're out, you could rent it out properly. Maybe they're not getting a very good rental income, because the property is not in great condition. You often find properties that are owned by landlords, they might have been fine at first, but over time they don't spend enough money to keep the property up to scratch. It just deteriorates, you get wear and tear. So eventually it's not a great property to live in, they don't attract the best tenants, they don't get the maximum rent, and they're just tired and fed up.
Whereas you come in, might put a lick of paint around the property, freshen it up a bit, and suddenly it's a more desirable property to live in, you can find good tenants, get a good rent, and you can make more money than the current owner was making on that property. So it's really important to understand how they benefit and how you can also benefit as well. So when there's a recession, when times are hard, when prices are coming down, it really is one of the best strategies to use, to go and find these landlords who've got properties they want to sell.
How Do I Find Landlords With Properties to Sell?
So how do you find them? Well maybe you go direct to landlords. You could write letters to the HMO registered landlords in your area. You can go to an Estate Agent, you can look out for landlords who want to sell and rent it out as well. What that means is the owner says I want to sell it, but actually, if I can't sell it I'll be happy to rent it in the meantime. This is exactly what a Lease Option is doing. You're renting the property, you've got the right to buy the property in the future. So it's about finding these people who are motivated. It's about understanding their circumstances and coming up with an ethical win-win solution of how you can do a deal.
Live Training for Purchase Lease Options & Lease Options
Now I'm actually doing some online live training all about this strategy, about Lease options and Purchase Lease Options. It's live online training, which means not only can you gain from the learning we're going through, but you can ask questions and get your questions answered. You can also listen to other people’s questions and the answers to those as well. You learn a lot quicker than reading blogs or watching YouTube videos.
When people learn about this strategy, they kind of go and try and apply it to every deal they find. Let me be really straight with you here, with most properties, a Lease Option is not appropriate. It's only in certain circumstances. So the circumstances are when the owner doesn't need the money from the sale now. If someone's selling a property because they need the cash for something else, a lease option isn't going to work because you're offering to pay for it in a few years' time, then that's not going to help them. Really you need someone who wants to get rid of a property, not because they need the money, they just don't want the property. They don't want the hassle. They don't want the responsibility. They don't want to be a landlord anymore, or they don't want to become a landlord. They just want to get rid of it, and they are struggling to sell right now. So these are people we can help.
When we understand that situation, we know what we're looking for, we're far more likely to be successful when doing Lease Options.
So first of all they don't need the money now. The next thing that's important when you're doing Lease Options is they've got favourable mortgage conditions. Ideally they've got a nice low interest rate, they've got a Buy to Let mortgage. It's an Interest Only mortgage. It's got a nice long term to run on the mortgage. If that is the case, that's favourable mortgage conditions, and maybe we can use a Purchase Lease Option in this circumstance to help them solve their problem, and you can get cash flow and extra growth from property you don't even own.
FREE Purchase Lease Options Training - LIVE
If you would like to learn more about Purchase Lease Options, join Simon Zutshi for some live online training, all about how you can use Purchase Lease Options and Purchase Options in your property investing.
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