Simply Junior

A real estate Option is the most useful of all real estate tools when it comes to making money. Not only can it control future profits, but also current profits when used for that purpose. We are all familiar with the benefits of Optioning land at a given price, then getting it rezone for a higher use, or finding a builder/developer who will joint venture to increase its value, or putting a mobile home on it to increase its value before exercising it.

A less known use of Options is when a property is being bought by you under a Lease/Option. Your Option can call for high Option payments, each counting toward the purchase price, and low rent payments. It could also be used to motivate a seller to hold the rents constant for several years prior to exercising the Option. When you subleased the property, your low rents would generate extra cash flow for you.

You might even negotiate a portion of the rents to also be applied toward the purchase price; so during the term of the lease, you could build equity by having a portion of the rents counted toward the purchase price.

The key to this is that your lease would give you the right to sub-lease, so your tenants could be paying the rent and earning credits toward the Option price that you will be able cash in on.

Another use of an Option is to control rents, and thus control value. Suppose you were renting a house and were willing to pay the landlord extra rent for an Option to Lease the house at a set rent for a number of years. This would set a cap on the rents even though the operating expenses, taxes, insurance, etc. might be climbing. If you subleased the property, each successive tenant could be paying more rent to you out of which you’d be paying the same low rent to the landlord.

Even though you had no Option to buy the property, at some point in the future the owner is going to approach you to buy the property because your low rents are going to cost him more than he is making after paying his rising costs. Your lease will make the property very unattractive to other landlords, and you might be the only buyer. You might be able to convert your lease into ownership of the property at a heavily discounted price.

On the other hand, for years, in lieu of rental deposits, I have used a payment for an Option to extend my Rental Contract for another year at a rent of no more than 10% more than the current rent. For this I am paid a sum roughly equal to what would have been a rental deposit, but which differs in that it will not be returned nor ever counted toward the rents.

Each time I want to raise rents, I set them just below the 10% mark and explain that my costs haven’t risen quite so much and I’m passing the savings on to the tenant who has been programmed that 10% rent raises are inevitable by his Option to Lease.

I saw this boat down a Harvey’s Marina and I want to buy it. We can get a five year loan at the bank and pay it off monthly. But, I do not want to wait ten years. Ok, let’s put emotion aside and look at some financial matters.

Wealth accumulation is a fancy word for saving money.

This is a combination of earnings from the account you’re putting the savings into and monthly contribution from your paycheck. Savings is divided into two different types, retirement (before tax) and all other (after tax).

As part of the decision on purchasing a boat let say for $15,000, with a monthly payment of $304.15 for 60 months the cost of the boat and trailer is $18,24.00. In addition, there is the boat registration fee, the trailer license, boat insurance, storage fee, and property taxes, payable on an annual basis. The boat will depreciate in value around $ 2000.00 a year and will be used maybe a half a dozen nights after work and on 8-10 weekends a year. Then there’s the operating expenses like gas, engine tune up and boat maintenance.

Let’s take a look at the order of spending priority in the family budget.

A vehicle is a necessity for getting to work, taking the kids to school, and for running errands. A car or truck depreciates in value each year you own them. Most loans on new car and used cars are for five years. At the end of the loan the value has declined to about 40% of original value. If you buy a car for $20,000 with payments of $386.66 a month for 60 month at 6% interest rate the cost of the car is $26,942.11. If you pay cash, the saving is 34% over 60 installment payments.

Then you can put the $386.66 into the accumulation account to repay the fund for the car payment eliminating interest expense. Housing is of equally important with transportation. To start out most of us rented an apartment. The largest purchase you make in your lifetime is a home. This is when you go from paying rent which usually covers all the expenses except utilities and personal property insurance.

Several things change in home ownership such as real estate taxes, insurance changes from renters to homeowners coverage, and repairs to the roof or replacement of the water heater. The net cost can be close to your rent but the cash flow is different. The best way to buy a home is to be able to put 20% down for conventional loan. There are many ways to finance mortgage but the loan cost increases as the down payment decreases. The accumulation account could be used to pay the down payment and help with cash flow.

Saving money in advance for a major purchase provides several options and will reduce cost of the purchase. If your dollars are

To your financial success,

Martin Braddock