Improve Cash Flow
Creative Lease One of the problems I have with my larger and more expensive single family rental houses is they don't provide enough income for my exposure. It has to do with the return on my investment or what I call my RENT-TO-VALUE FACTOR. The rent-to-value factor is my measurement for how much money my asset or house is bringing in each month related to its value. For example, if my house has a value of $60,000 and brings in $600 monthly rents, my rent-to-value factor is 1.0! You may recall from seminars or my strategies study courses that my normal income from my smaller rental houses is generally 1.5 and higher. To arrive at my rent-to-value factor, simply divide the monthly rent by the house value and move the decimal point two places to the right. Thus, using the $60,000 house example above ($600 rent -$60,000 value = 1.0), the same $60,000 house rented for $800 would have a rent-to-value factor of 1.33, which of course, is more to my liking. Selling is expensive. My smaller rental houses, like the ones I purchase in groups, have values like $20,000 and bring in monthly rents of $450. That rent-to-value factor is 2.25, which gets us back to why my bigger rental houses with very low rent-to-value factors are not nearly as exciting to me. They don't have enough cash flow to suit me.
I realize there are opposing views about my strategy to operate smaller, less glamorous properties - and I'm also aware that bigger three bedroom, two bath homes have many desirable investment qualities that my older and smaller rentals don't possess. Still, the cash flow is the main attraction. It's like I tell my students, "I'm only in the real estate business for the money. "That's it! But, I also recommend buying bigger houses when cash flow is not a problem. Now let's explore how and why I use my special lease-option with larger houses rather than selling them outright.
When you understand this strategy you'll discover that it's a lot like throwing the Yo-Yo, but hanging onto the string. I would ask you to think about the balance of benefits as I explain the plan. Is it well-balanced for both parties? Is there a winner and a loser, or does everybody win? If for some reason you feel it's not a balanced deal, by all means adjust it to suit yourself. But don't lose sight of what both parties need to accomplish. From my point of view as an owner, here's why I like my three-year lease-option plan. Also, here's what I'm trying to achieve:
As a general rule, folks who continue to own and operate properties that generate income tend to get lots richer than those who buy and sell. The main reason for this is because selling is expensive in most cases. Often, new bank loans cost fees and points, more expenses for commissions, appraisals, termite clearances and escrow charges. Finally, paying capital gain taxes further erodes any profits. It's my long-held view that allowing tenants and lessees to pay off my real estate is a far better strategy for a worry-free retirement and fat bank account. That's why my three-year lease with option plan is an excellent wealth-building tool. Remember the yo-yo and who's got the string.
Many good paying renters will never possess two months rent all at one time. Don't ask me why - I'm only a poor landlord who rents to them, not a psychiatrist. The point is, these renters will pay their monthly rent, but they'll never have a down payment to buy anything. Many "Yuppies" only plan 'til next weekend; a year from now is out of the question.
This same bunch has another financial flaw. They are too much in debt to meet the bank's customary net income requirements to quality for a home loan. Therefore, if getting a new mortgage is a requirement of your option-to-purchase, you can forget it. The Yuppies already know because they've tried before. Still, they're good folks with jobs who pay their rent on time but their bank account sucks.
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