Currently have a single family 3/2 that's in another state, have it set up with the tenant as a lease with a separate option to purchase agreement. Because tenant wants to buy, they are willing to handle all repairs so I don't do any, plus they pay higher rent (every month paid on time means a credit towards their future purchase price). If done right, and this needs to be set up in advance, after 12 months of timely rent paid (proven by cancelled checks or receipt from property management company, not letter from landlord), some lenders (but not all) will consider this a refinance not a new purchase, and the tenant can buy from you with no additional down payment needed. Nice thing is tenant pays landlord a non-refundable'option fee' instead of a refundable security deposit...this means if tenant exercises option to buy, they get that option fee credited to their new purchase price (but you never have to return that option fee if they move out without buying). Option fee is usually $3-5k from what I can tell, more than you are likely to get as a security deposit, and tenant is more motivated not to mess up your property, to make sure they figure out how to get their credit score up to where they can buy from you, etc.
Basically short version is: You set up lease with separate option to purchase agreement, have tenant direct deposit into your account every month so you don't hear from him/her for repairs etc. for 12 months+ till they either move out or exercise option to purchase. Minimum for 12 months to get cashflow, and you can choose to renew for additional periods of time, with a new option fee charged each time. Tenant will be very motivated to figure out how to buy the house from you after putting so much potential credit towards the down payment or purchase price. If they don't buy, you work with a rental agency or real estate agent to fill the vacancy with another tenant-buyer so that you're not stuck doing repairs. I have the tenant sign off on the property inspection (if you had one done, it should still be current) so that it is confirmed as-is and no liability to landlord if tenant accepts condition. I send Lead Disclosures etc. to be safe, but I think that getting tenant to sign acknowledgment on each page of inspection report that 'Tenant accepts condition and no liability to (your name) - (signature and date)' seems like a good motivation for tenant not to try and sue later. I have tenant sign off on digital photo printouts of the condition of the property separately (what the walls and carpet look like, separate from the inspection report on structural items).
Please note - VERY important to keep these as 2 separate agreements, tenant must first satisfy ALL terms of regular lease before they can earn any rights to purchase...this means if they don't pay rent on time they do not have ANY equity or prepaid down payment under the separate contracts...it is only after they fulfill terms of the lease perfectly that they have any rights in the property ownership. Otherwise if you do this wrong a judge might be reluctant to evict if tenant can say they are paying higher rent towards equity etc.)
I am working up some final agreements for that state with my lawyers, working out some final kinks to make sure certain items are in there for landlord's protection and still be fair to tenant, it's not ready yet and you'll want to run it by your own lawyers for state specific info, but if that can help get you started let me know. Let me know where to email them privately away from this site if you like.
Also, do you have equity in your properties yet? I'm assuming since you own them outright you can just access your money right back. If you bought them below value you can get more out of them too. I bought mine at as a short sale (below tax assessed value), set up lease and option to purchase with tenant-buyer then within 5 hours of closing on my property my bank offered me a home equity line of credit on it for $25k. Not a ton of money, but this was within 5 hours..not 12 months :)
So I'm taking a portion of this (bear in mind that a HELOC reports to your personal credit score, so if you max it out it's potentially as bad as maxing out a credit card) so I'm being ultra-conservative to protect my credit score and only using about 30% of that credit limit. That's kinda pointless since that's $7500 but the rest is there for emergencies, and I'm testing out this new 'system' for when I have another property with a larger amount of equity.
So what am I going to do with that money? Not buy a jetski, or any other depreciating asset, haha! I've got a private investment that'll return 3-4% a month cash flow. So I'm getting rental income profit from my tenant each month for a minimum of 12 months, the possibility of a cashout in a little over a year if/when my tenant exercises his option to buy at the predetermined purchase price (we marked it up a certain percentage over what I paid out of pocket), as well as the 3-4% monthly cashflow from the equity I accessed (since I'm paying the bank 6% a year interest to use that HELOC, the difference between the 6% I pay and the 36-48% I'm earning on that very same money ain't tooo bad!!) You can also loan the money secured by deeds of trust which usually cap at 12%/year (you're accessing the HELOC at 6% and loaning it out at 12% plus origination fees).
Actually come to think of it, since you own the properties outright, you can sell NOW, rather than lease with option to purchase, because you have no bank holding your mortgage. So you could charge the buyers up to 12% year (depending on their credit score) since it's your own money you're financing to them, you become the bank, and get that 12% return. I think if it's owner occupied and you charge above 12% you may need to check against usury laws - may or may not apply but don't want to do predatory lending to an owner-occupant, whereas if it's a business transaction (investment property to the buyer) then you may be able to charge higher, or for shorter periods of time.
Last thought is, say you seller finance to your buyers who are living in the house and you get tired of it or need to pull out cash quick. You could sell the promissory note (their promise to you to pay every month until paid off) to another investor at a discount - you get cash now instead of over the payoff term, and the new investor buys the cashflow from the note. So you could definitely get out from under it if you didn't want to have to wait around for the cash.
A guy I met in NY rehabs properties, sells them for 5% down payment as a seller-financing deal. He transfers title to you through his lawyer. Same day he turns around and sells the note on the loan to an investor, who gets it from him at discount (he's still making money since he bought low as foreclosure and rehabbed to make marketable). Notebuyer collects payments on the note till the buyer can refinance without needing a new down payment, usually after 12 months but depends on the lender, could potentially do sooner since title has already transfered.
So if you want to sell, you can collect monthly cash flow this way or sell the note and get a lump sum when you're tired of the cash flow (monthly cash flow is better than a lump sum of cash just paid to me, because then I have to go out and arrange the next deal which means more active work on my part (I love to work, but you see my point here) whereas if you're getting a trickle of cash flow every month you're making money passively and can focus on doing the things that you love elsewhere. If it's direct-deposited, you don't have to do anything but check your online bank statements to make sure it got paid on time. With the lease/option to buy scenario, tenant is very motivated to pay on time since he gets a $100 or so credit towards the purchase price as well as a $50 late fee if late (so he's actually losing $150 every time he's late) so that keeps it very low maintenance for 12 months at a time since tenant's doing all repairs and enjoying premature 'pride of ownership' and caring for their future property they hope to own. If you sell upfront and finance, you also get cashflow and no repairs, but you no longer have the title so if the property appreciates you've already set your price and sold (plus if you just bought them do you need to worry about capital gains taxes and figuring out the next deal for a 1031 exchange? Again, active income vs. passive long-term income is my goal :)
I hope this helps. Let me say I complete admire and envy you for owning 2 outright. I hope to be in that position soon, but right now just learning to leverage less into more until I've created enough cash flow out of thin air :) to make that a possibility.
Hope these suggestions help - would love to hear how it turns out for you no matter which direction you decide to take? Thank you! :)
-m
--66.235.x.xxx