- Lease options. What the hell is it?
Or how should you structure it?
Well, Clint Coons here at Anderson Business Advisors.
And in this video,
we're gonna talk about what you should do
for your real estate lease options and structuring.
Alright, let's get started.
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Okay, so lease options, you know,
if you're not familiar with the strategy,
it goes something like this.
You have a property and you bring in a tenant
and you wanna give the tenant some incentive
to, A, maintain the property,
get a sense of ownership there
because they'll stick around longer
and make a little money off this deal.
So you have this tenant come in and you tell them,
"I'll tell you what.
I'm gonna lease you the property for two years, right?
For a two-year time period.
And if you lease it from me for two years,
at the expiration of that two year period,
you like the house, I'll sell it to you."
And so then you come up with a sales price
and let's say, we agreed to sell it at $150,000
at that point in time.
That's gonna be the sale price for the property.
Now, the tenant, in order to get this transaction together
and get the benefit of this,
they're gonna give you some option money, it's called.
That's where that option comes in. So this is the lease.
And then the option money is money you receive
in exchange for agreeing to sell them the property,
in two years at 150K.
So let's say the tenant provides me $10,000 option money.
Now, first off, the great thing I like about lease options
that I really like is
that this money you receive, this option money,
it ain't taxable, right?
That money is tax-free to you, for a while.
So you bring in 10K on your lease option.
You don't have to take pay tax on that money until a couple
of things happen.
A, they exercise, and then when they exercise it,
it gets added into your sales price.
So that's longterm capital gains for you,
or they default on the lease option agreement.
And so when something happens with that option,
that is when you have to pay tax on that money.
So if the tenant carries it all the way out
to the two-year period, exercises it, then you'll pay tax.
So now you got 10K that you can invest with,
that is tax-free to you for a period of time
or we'll call it tax deferred.
Okay, so that is the basics of a lease option.
Now there's other some subtleties to this,
that there are real estate investors out there
that do this all the time that will tell you,
"You can do it this way or that way."
Don't need to go into those details because I wanna talk
about how do you structure this
from an asset protection standpoint?
We'll keep in mind
that in a lease option arrangement like this,
you're the owner of the property, okay?
Until you sell it,
until the tenant exercises that option, you own it.
So if anything goes wrong
during the lease period, you are liable.
So you wanna make sure that you're protecting yourself.
That is why in lease options, we will typically set them up
in limited liability companies, just like this.
So the tenant then is leasing from the LLC,
not from you individually.
So if anything goes wrong, I mean,
the tenant can even hurt themselves on the property.
Just because they've agreed to buy it,
doesn't relieve you of liability for your tenants
and that particular property.
So by having the LLC there,
what you're ensuring is that you have asset protection
and then maybe you bring that zero loss strategy
in on top of that,
with the equity stripping technique that I showed you
in my zero loss strategy video
to further reduce the equity that appears on title
to an aggressive creditor.
So for lease options,
we're gonna use limited liability companies
to hold the property.
Depending on the property and when you bought it,
let's say I just bought a property,
put a tenant in it, did a lease option.
It could be looked at sometimes as a sale.
The IRS could view that as a sale.
So that may be considered a flip.
And so we wanna get with a professional
and we would analyze it.
And in that context this entity here may be owned
by a separate entity like a corporation.
So maybe we have a corp down here owning it.
If it's going to be considered a disguised sale,
that it's actually a sale of this property
at that point in time.
So I don't pay, I'm not treated as a dealer.
If it's not and it's going to be looked at
as an investment asset,
then we would have this LLC held by our Wyoming LLC.
So that's it! Not a lot on this one.
It's pretty straightforward
and simple how you structure lease options.
You're going to use limited liability companies
to hold the property,
for the reasons we do
with any other investments that we held.
All right, hey, if you're not a member,
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And I wish you all the very best with your investing.
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