Property Lease Options and Interest Rates?
We recently had a question posted on our website by Joe Brand, and wanted to share that, and the answer.
Joe Brand says:
I have been trying to get into lease options for some time . I have one worry, I realise that if you take over a property with a mortgage, you pay this on behalf of the owner and let the property out and reap any benefits. What happens if the mortgage rates rise (which does seem inevitable) unless there is the opportunity to increase the rent, you will be losing money (as I am doing with one property I own now) Advice please Joe Brand
How to Guard Against Interest Rate Rises to Ensure Your Lease Option Deal Stays Sustainable
Thanks for leaving a comment on the website, we really appreciate feedback and welcome questions any investors have on lease option investing. I can understand your concern, because we are all too aware that interest rates will go up. There are a few things that you will want to consider in order to invest successfully using lease options:
1. Always stress-test your lease option deal.
This means, try to project what could happen to to your payments if the interest rate rose and you had to pay 7%! Does the deal still make sense?
2. Look for ways to maximise the rental return of your lease option deal.
There are a number of letting strategies which will allow you to collect more than the generally accepted market rent for the property. Rent to buy (also called rent to own) is one of them. By using a shorter term agreement with a tenant-buyer you may be able to avoid huge rate hikes, since the option will be exercised within 12 – 24 months. (Take a look at our Lease Option Investor Handbook for more detail on this simple but very effective strategy).
Another way to maximise your rental return is to multi-let the property – though this can be very time consuming and demands good management skills or a good lettings agent. Property investing is powerful, but not easy, by the way!
3. If the interest rate rises above ‘x’ allow the seller to contribute the difference to keep your lease option deal alive and kicking
I have a host of these set up and this simple lease option strategy can turn a damp squib into a bright star of a deal. Be sure your seller is not in financial distress.
4. Target property with little or no mortgage.
Believe it or not, about 1 in 5 properties in the UK is mortgage free! Now if you target those sellers, you will never have a problem with rate rises!
Hope that helps you to create sustainable lease option deals.
Be sure to check this advice and other very practical and simple tips in our new Lease Option Investor Handbook!