Three scenarios, three profit numbers — know your upside (and your downside) before you sign anything.
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A lease option gives you control of a property without buying it outright, and that control can be monetized three different ways — which is exactly why this calculator runs all three scenarios side by side instead of just one. Most new investors only think about "exercise," where you eventually buy the property yourself. But the "sandwich lease option," where you control the property from the seller and simultaneously lease-option it to a tenant-buyer at a markup, is often where the real profit lives.
In a sandwich deal, you're the middleman between the seller's option and the tenant-buyer's option. You collect option money and monthly rent from your tenant-buyer at a higher price than you're paying the seller, and you profit from the spread whether or not your tenant-buyer ever actually exercises their option. That's why Scenario 3 — the option simply expiring — is often the floor of your return, not a failure case.
Say you control a property from a seller at a $200,000 option price with $1,200/month rent, putting up $3,000 in option money. You then lease-option it to a tenant-buyer at a $215,000 option price, $1,400/month rent, and collect $5,000 in option money from them. Immediately, you've pocketed a $2,000 spread on the option money alone, plus $200/month in rent spread ($2,400/year). If your tenant-buyer never exercises, you keep all of that — and if they do exercise, you also capture the $15,000 spread between what you're paying the seller and what they're paying you.
Lease options are the most flexible tool in the creative finance toolbox, and also the most misunderstood. People hear "rent-to-own" and think it's simple, but the contract terms — option period, rent credit, who pays for what maintenance — determine whether this is a great deal or a headache waiting to happen.
The number I look at first isn't the exercise scenario, it's Scenario 3 — what happens if the tenant-buyer never buys. If you're still profitable when the option simply expires, you've got a deal with a real floor under it. If your entire return depends on the tenant-buyer exercising and everything going perfectly, you don't have a deal — you have a bet.
A lease option (also called rent-to-own) is a contract that gives a tenant the right — but not the obligation — to purchase a property at a predetermined price within a set time period. The tenant pays option money upfront and typically a monthly rent, with a portion often credited toward the purchase price.
In a lease option, the tenant has the right but not the obligation to buy — they can walk away and lose their option money. In a lease purchase, the tenant is contractually obligated to buy the property at the end of the lease term. Lease options give buyers more flexibility but sellers more protection from buyer default.
Investors use lease options as a sandwich deal — they lease-option a property from a seller, then sublease it to a tenant-buyer at a higher price. They profit from the spread between the two option prices, the monthly cash flow difference, and the option money they collect. They can also assign the contract for a fee.
If the tenant-buyer does not exercise their option to purchase before it expires, they forfeit the option money paid upfront and any rent credits accumulated. The seller (or investor in a sandwich deal) keeps the option money as income and regains full control of the property to re-rent or re-sell.