Beginning Investments with Lease Options to Buy Commercial Real Estate

Using a Lease Option to Purchase Commercial Real Estate....really?

What is a Lease Option?

Investing in a lease option to buy commercial real estate provides an easy way to begin your investment portfolio. Lease options to buy allow you to purchase the legal right to buy the property in a fixed number of years in the future while making monthly lease payments to the owner. This investment allows you to take position of the property and sublease it from the tenant.

What do I need to know about lease options?
A lease option is a legal right to purchase the property. However, there are many variables to lease option transactions. Be sure that you do your homework before you commit to a lease option to buy. When considering these transactions, you will need to negotiate more than just the sales price. You will need to settle on rent credits, repair liability, closing costs and option consideration. Further, you need to bear in mind that the property may or may not appreciate in value.

Financing
Do you need financing for this deal? Before jumping into a lease option to buy make sure you obtain loan pre-approval from your lender to allow you to exercise your option. In other words, you need to have the money for when you are ready to actually buy the property. With the market tighter than it has been in past years, it is important that you have your financing taken care of and the loan properly underwritten.

Further, make sure that you have agreed to and understand that your lender may only be able to offer a certain interest rate structure. Some lenders will only offer variable interest rates, which can be subject to change at any time with or without notice. If your interest rate goes up three points, will you still be able to profit from your investment? Make sure that you talk to a variety of lenders to find the right financing for your needs.

Appreciation or Depreciation?
With the change in market conditions over the past year, many property owners have experienced significant valuation declines as fair market values have decreased. If you exercise your option to purchase three years from the purchase of the lease option to buy and the property appraises for less, you may have to find additional financing to cover costs.

Is the Property Worth It?
Sellers offer lease options to buy for a variety of reasons. They may not want to lose the asset quite yet or they may not be able to unload a bad property in any other way. Lease options may become more prevalent as financing becomes more difficult to obtain. However, it is your responsibility to do the homework. How has the property performed? What is the current occupancy? What are the occupancy rates from the last five years? Look to all the data you can obtain to make sure it is the right fit for you.

Lease options can be a great way to begin to grow your commercial real estate investment portfolio. Just make sure that you get all your ducks in a row before you jump in!