Today’s REI Classroom Lesson

In today’s lesson, Jack Shea discusses how lease options are minimal risk and can be used for multiple real estate deals.

REI Classroom Summary

Protecting yourself legally and having privacy is a benefit of lease options and can also provide protection in a down market.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Jack: Hi, my name is Jack Shea. I’m a long-time real estate investor for about 30 years in houses, multifamily, on notes, personal property like mobiles and car notes. And one of my favorite strategies, and the one that I’ve used most of the time whenever I could has been options. And I’ve written a book about options and I’ve done it exclusively for more than 15 years.

Mike: This REI Classroom real estate lesson is sponsored by

Jack: So I’d like to tell you what I have learned from this and hope that you can put these to work in your own investment program. Why are they very powerful? Because they have very high leverage with minimum risk, maybe 50 to 1. You can option a $100,000 house for $1000 or $2000. Not $10 or anything like that, but there’s some serious money but not a ton. These options are very strong legally, and commerce in the US, all kinds of stock options was part of the cause of the failure of the last bank failures, lots of credit default swaps.

But they’re invisible, they’re portable, they’re exchangeable, they can’t be attached, they’re private. So you have a million dollars’ worth of options and they can’t be attached because it’s a future interest. So you can use them for real estate, for notes, for personal property, you can use them in a lot of places and people are agreeable.

So the minimum risk part is one of the things that I like. Since you’re not the titleholder, the things like lead-based paint, and radon gas, and EPA type problems don’t go directly to you. The maximum that you can lose is that $1000 or $2000, whatever your option money, so it keeps you out of harm’s way.

And one thing that I found after years of . . . I optioned 50 properties in one year and I had quite a portfolio already, but I found out how I could depreciate property that I didn’t own. And that’s been very productive because a $100,000 house that’s $300 a month and that’s about the average positive cash flow that you can take tax-deferred. And one of the things that it does is gives you a protection for a down market.

This last one I’ve seen various ups and downs over many years, but this ’07 crash and Florida properties went down 50% and people that have options didn’t lose money, you just didn’t close the option. And 95% of owners would lower their price to the current reality of the market. At the end of the day, you find out that your cost of funds to option property is way below the market.

On the other hand, for tenants, we put tenants in for options. But I had a year in court and I found that I try to evict, the judge said, “You can’t evict that tenant, he has an option, he has a title right. So you have to do a foreclosure.” So I invented a contract for option and solved that problem. So thousands of people coast to coast have been using that for many years.

So I say get all the options you can, don’t ever give any option. And at the end of the day, when your time is to exercise, you can close it for cash, you can sell the property, you can lease it out or continue the lease so you can sell it on terms, or you can exchange options.

I have a 1031 exchange business. A lot of people say you can’t do that. Yes you can, I have the tax code. So there are a lot of reasons to use it. You don’t find it with short sales or IRS sales, but when you can find it, it will be profitable for you and you should have that in your toolbox. You need to know it before you need it.

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