Another way to profit is equity - Posted by William Bronchick
Posted by William Bronchick on August 03, 2003 at 13:50:20:
I’ve done a few lease/options on higher end homes and made a nice profit on the back-end equity.
So, for example, if you can lease/option a $300,000 home at a purchase price of $250,000, then sublet with option to tenant/buyer for $300,000, you could potentially make $50k on the back end. However, as Vic points out below, there’s no cash flow, even potentially negative cash flow in the interim (a $2100 PITI payment might only yield in a $1800/month rent).
And, there’s the risk that the market value of houses could drop in the next year, as well as the possibility you could have a vacant house for 3 months.
However, as a mentioned in another post, having a cash reserve on such a deal could work. For example, if you have to pay $300 per month for 18 months negative, that’s $5400. Add a few months vacancy, and you’re up to $6000. But, consider the $50k back end, and you’ll see that it’s a worthwhile investment. If the market values drop 10%, you could still drop your price with the tenant buyer to $270,000 and come out ok.
Use your common sense and basic, sound business principles.