How is a lease option tenant different than a regular tenant? – it’s a question I get asked quite often. And the short and simple answer is they’re a lot less pain in the butt. OK. I know that doesn’t tell you much so let me expand.
I love doing lease options. I also have a certain number of properties in my “buy and hold” portfolio that I never plan to sell. What most investors don’t realize is that the real way to wealth in real estate is by owning several properties free and clear and having large amounts of passive income coming in every month.
However, even if you screen the heck out of regular tenants (as you should) they’re still not going to be as ‘easy’ as lease option tenants. You see, lease option tenants have an interest in the house. From the day you meet the tenants to the day they end up buying the house, you should constantly remind them that this is going to be their house and they should treat it as such.
You want to “brainwash” your tenants into treating the house as if they’re the homeowners, because hopefully they will be. From the second I meet a potential tenant I talk about how the house is going to be theirs and how they can make changes to it if they want (as long as they check with me) since it’s going to be theirs, etc. In fact, I’ve had many of my lease option tenants carpet an entire house, paint a house and even put a deck on a house.
How many regular tenants are going to do something like that?
Since regular tenants don’t have a vested interest in the house, they’re obviously not going to take care of it the same way a lease option tenant will. Another aspect where lease option tenants are different (and better) than regular tenants is when it comes to repairs.
With most traditional rental properties if the toilet leaks and you have to call a plumber, the landlord has to pay for the repair. Or, if the washer breaks, the landlord has to buy a new washer. However, with all of my lease option tenants, they are responsible for the first $300 in repairs.
And since most repairs are less than $300…
This means I almost never have to come out of pocket for repairs. In fact, I NEVER do. How is this possible? Well, like I just mentioned, part of my agreement with lease option tenants is to cover the first $300 of any repair. After that my company will take care of the rest.
But, so I never have to spend money on repairs, when I do sandwich lease options, I have an agreement with the owner that I will pay the first $250 on repairs and he is responsible for the rest.
For instance, a while back I had a hot water heater bust on one of my houses. The bill to fix everything came out to about $1,300. My tenants sent me a $300 check. I sent the owner of the house a $250 check and he covered the rest. And I ended up making $50 on the whole thing.
Not too bad of a deal, when you end up getting paid for repairs. And if you’re not doing this type of set up yet with your tenants, make sure and initiate it on your next lease option deal.
So as you can see, lease option tenants are more profitable in the short term and easier to deal with, but don’t forget that real wealth is made from traditional tenants.