The real estate market may have hit a serious downturn, but lease options are still a viable option for real estate investors searching for monthly cash flow. Lease options are a great way for a would-be buyer to purchase a home - and provide premium cash flow for investors at the same time.

A lease option gives the seller the right to purchase a property at a later date. Typically, the price is pre-set, but you can also have the buyer pay market value if the option is exercised.

Lease Options Explained

If you've got rental properties, a lease option provides the best of both worlds. You get a steady renter, more rental income, and a tenant who will treat the home like they own it; in their mind, they already own it.

The buyer pays a deposit, typically 3 to 5 percent of the purchase price. They pay rent - often at premium rates - that go toward their deposit. Usually, they can exercise their option to buy within a two to three-year period, during which time they must arrange for financing with a third-party.

They can buy if they want or they can choose not to buy. No matter the decision, you as a real estate investor get to keep their deposit and premium rental rates.

Lease Options Provide Benefits For Buyers And Sellers

The option money does two things: It takes the house off the market for a set amount of time and it gives buyers options to buy if they choose. As a real estate investor, you get money no matter if the buyer decides to exercise the option or not. The buyer, however, also gets the first shot at buying the home.

Let's say a buyer doesn't qualify for your home now, but will in two years. You charge a higher deposit, a premium monthly rent, with a percentage going towards the purchase price.

Fast forward two years later and hopefully the buyer will be in a better position to buy. They'll already have their down payment if the seller applies it to the mortgage. Let's look at this example: You have a $160,000 property on a 2-year lease option with 10% option money.

Monthly payments are $1,000 with 20% going toward the purchase price. At the end of the option, the purchase price would be $139,200, with $16,000 in option money and $4,800 in lease payments going towards the purchase price. Option amounts are negotiable, generally 3-5 percent of the purchase price.

As an investor, you unload the property plus you've generated a healthy monthly income. The buyer, meanwhile, gets their house. Lease options provide win-win options for buyers and sellers.