How many rental properties do you dream of owning? Most investors want to own as many as possible. A long time ago I also believed owning as many properties as possible was the best answer…. Until I didn’t think that any more… It took a leap of faith, but one day I took the time to consider the pros and cons of owning multiple properties. I figured out the number of properties I really wanted to own out right is a big Ø – even as a highly successful real estate investor. What I discovered is what I really wanted is to control as many properties as possible without the hassles and financial commitment of ownership – and you should too! The magic happens when you understand the wealth building capability of lease options and sandwich lease options.
The Con Side of Owning Multiple Properties
For most real estate investors, it’s counter-intuitive that merely controlling properties is financially superior to outright ownership. From highly experienced investors to beginners, available cash for investing is typically in limited supply. Experienced investors might own 20 rental properties with a book or retail value of well over a million dollars. Those rental properties can be leveraged (borrowed against) to free up liquid cash, but that means putting owned properties at risk as well as taking on debt that has to be eventually repaid. For the purpose of understanding the pros and cons of owning multiple properties let’s assume the experienced investor has $15,000 in liquid cash to invest. The same amount that a beginning investor is likely to start with. For both experienced and beginning investors $15,000 is enough to qualify for a mortgage to own a $150,000 rental house. The experienced investor might be able to stretch this amount into 2 properties based on historic performance. But neither investor, new or seasoned, is likely to take ownership of more than 2 houses.
The Pro Side of Controlling More Properties Using Lease Options
When you understand lease options, it becomes clear you can control and profit from more properties than if you own your rentals. Rather than a $15,000 down payment to own a rental, that cash is better applied as option fees to take control of multiple houses with options to buy at a later date. As a knowledgeable investor, I’d consider a $2,000 option fee when buying a $150,000 house to be on the high side. But we’ll be conservative here and go with that number. The result is $15,000 gives you control of 7 houses rather than ownership of 1 or 2 houses. Your monthly positive cash flow from rental income is going to be about the same whether you own or lease those houses. To keep the example easy, assume rent income each month is $1,500 (1% of the purchase value). From that income, you can expect to pay about $675 per month towards the mortgage if you buy or the same amount if you lease. Both ways it leaves a gross monthly profit of $825 (before taxes, insurance, and maintenance/repairs).
ROI is the Big Pro With Lease Options
Here is the big kicker when it comes to the pros and cons of owning multiple properties versus lease options. The owner bought 2 houses (at best) for the $15,000 investment. That creates a gross monthly profit of $1,650 ($825 X 2). The lease option investor took control of 7 houses. This creates a gross profit per month of $5,775 ($825 X 7). The clear winner is the lease option investor who earns $4,125 more each month ($5,775 – $1,650) than the rental owner. As big of advantage as this is, it becomes much more rewarding when you consider the return on investment (R0I) ratio. Below is a simplified calculation which excludes taxes, insurance, and repairs but all things being equal these should be in proportion for each house regardless if it is owned or leased (lease options can be negotiated to pay a smaller portion of those costs). The annual gross ROI for the owner is 132% (12 months X $825 rent profit X 2 houses = $19,800, $19,800 / $15,000). The gross ROI for the lease option investor is 462% (12 months X $825 rent X 7 houses = $69,300, $69,300 / $15,000). Controlling the property with a lease option is the clear financial winner over owning the property.
Even More Positive Income From Lease Options
Let’s keep in mind, owners do gain appreciated value that option investors will not gain. First, it will take many years before the appreciated value catches up to that huge difference in ROI. Furthermore, the option investor will have pulled in even more profits over a couple of short years and then moved on to repeat the deal several times long before the appreciation (which isn’t liquid) catches up. This is where the sandwich lease option becomes far superior when considering the pros and cons of owning multiple properties. The lease option investor puts an end buyer in place who pays the rent until the purchase is completed. The end buyer pays you a lease option fee which almost immediately returns your original investment. When your investment becomes ZERO, your ROI becomes infinite. Typically, you even profit by collecting a higher option fee than you pay. In our example, the rent profit was a wash between the owner and the lease option investor except that the lease option investor was collecting positive rent on 7 houses instead of 2. The lease option investor collects another big payday when the end buyer completes the purchase. For our example, we’ll assume the lease option investor sells to the end buyer for $10,000 more than he or she has an option to pay the original owner. The sandwich lease option results in a $15,000 initial investment that is returned to the investor almost immediately + a gross rent profit which is far superior to the house owner + a sales profit which exceeds the owners appreciated value. All without the responsibilities and risks of ownership. When it comes to the pros and cons of owning multiple properties, the lease option wins hands down. By Wendy Patton For more than 30 years, I’ve used the Sandwich Lease Option System to earn my students and myself millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of this fact and my personal success that I share the Sandwich Lease Option System with others. If you found this information useful, please visit again soon at wendypatton.com. For more exclusive content, please subscribe to my RSS Feed and YouTube Channel. What did you think of this article? Please leave a comment below.
