How Much Deposit Should You Ask for in Rent To Own Investment
Tonight I want to talk about how much deposit or how much option consideration you should collect when you are doing a lease option in a Rent To Own Investment.
A deposit in a Rent To Own a Lease Option Investment is actually what is called an Option Consideration in some circles.
What that is, that is the initial money that they put up as good faith to say that they want to purchase your property sometimes in the future.
How much? Well it depends on the price of the property, depends on their credit rating, it depends on your area and it depends on your expertise and how much equity there is in the property.
Price of the Property
Most people or a lot of people will say they want a minimum of 5% down. So if you are doing a $300,000.00 property so that is $15,000.00. If you are doing a $100,000.00 property that is only $5000.00. I tend to go on the lower side because, keeping in mind these people that are trying to do Rent To Own do not have enough money saved up to purchase a property.
So they are usually cash strapped and/or their credit rating is hurting. You will hear a lotof people saying if people are asking 5% down well if I had 5% I would not need to do Rent To Own. Which is usually the case or is the case in some situations. You can ask for 5%, you can ask for less just keep in mind that the less that you ask foryou are increasing your risk because now these people do not have as much steak in the game.
Also, keep in mind that the higher the amount you are not going to be attracting as many people. So again it is based on the price of the house so you can go anywhere from $5000.00 $15,000.00 or it can even be less. So for $100,000.00 property I would usually ask for about $3000.00 and for a $300,000.00 property I am in the range of $10,000.00. So it is a little bit less than the 5% usually in the 34% range. Again trying to make it more attractive for people that are investing and trying to make sure that I get more investments.
The other consideration is the equity.
Sometimes we do what’s called a lease buy back. A lease buy back is when someone who owns the house has gone out and gotten a second mortgage, has taken out a bunch of loans and has all this debt that they have to pay but they have equity in the property.
So let’s say the property is worth $300,000.00 they only owe $200,000.00 on the property and need $50,000.00 to pay off their loan. So what we do is we might buy the property for $270,000.00 leaving some of the equity in there for them and pulling $30,000.00 out for the down payment.
So the property is worth $300,000.00, they owe $200,000.00 in mortgage, they owe another $50,000.00 in debt. So that means they owe $250,000.00 and they have a difference of $50,000.00. We come in and buy it at $270,000.00 so there is $30,000.00 in equity, we take the other $30,000.00 put it on a property. People tend to want to do that because they find they haven’t interrupted their pattern enough so they are looking for more security.
The other thing to consider is will the people be able to buy the property. So the higher the deposit they put down the lower their monthly payment would be. So if they put $20,000.00 down their monthly payments would be a lot less if they only put $10.000.00 down. The idea is the initial deposit, plus their monthly payment all those come together to form the down payment when they go to purchase in 3 years.