Why the Sublease-Option Strategy Isn’t Financially Feasible
July 16, 2011
The main reason I am not a fan of the sublease-option strategy that is being taught today is that it is not financially feasible. In other words, there is just not enough profit in most sublease-option transactions to make them financially worthwhile. For example, under a typical sublease-option scenario, a lessee-optionee would be lucky to receive from a tenant-buyer a $1,000 option fee and a monthly sublease payment that is $100 above his or her lease payment.
In most cases, what appears on paper as a $100 a month positive cash flow really is not. This is because most investors involved in sublease-option transactions never bother to factor in the amount of time they spend managing property as a business expense. If they did, they would come to the quick realization that they are working for minimum wage. I do not know about you, but to me, the prospect of working for minimum wage, especially as a self-employed real estate investor, has zero appeal! However, low wages are not the only thing that most sublease-option investors have to look forward to. There is also the very distinct possibility of having to evict a tenant-buyer and pay the lease payments while the property is vacant, along with the costs associated with finding another tenant buyer.
And these out-of-pocket lease payments and other costs that can never be recouped under a typical sublease-option scenario are the reason sublease-options usually do not make any financial sense. I know a former sublease-option investor in Richmond, Virginia, who ended up paying over $4,700 in property repairs after he refused to give his tenant-buyer a six-month extension, and the enraged tenant totally trashed the place before skipping town. All in all, this investor claims to have lost $6,300 on his first and last sublease-option deal.