Have you ever wondered if there’s a way to rent a home now and buy it later, without jumping straight into a mortgage? It sounds like the best of both worlds, right? Some property owners offer lease agreements, such as a lease option, that give tenants a chance to purchase the property once the lease ends. Let’s talk about how this setup works and why it could be a smart move in your investment journey.
Main Takeaways
- A lease option lets tenants rent a home with the right—but not obligation—to buy it later, giving flexibility to both renters and investors.
- Investors can benefit from having a steady rental income, potentially getting appreciation, and gaining responsible tenants. All the while, they can keep the option fee and control of the property.
- Lease options vs. lease purchases: lease options offer flexibility, while lease purchases (rent-to-own) require the buyer to complete the purchase at the end of the lease.
What Is a Lease Option?
The most experienced Northern Virginia property management companies will tell you that the lease agreement is one of the most important parts of any rental. It sets the terms, expectations, and even the possible exit plan for both landlords and tenants. One common option that gives tenants flexibility is a lease option.
In simple terms, a lease option — also known as a “lease with the option to buy”- is a rental agreement that gives the tenant the right, but not the obligation, to buy the property after a certain period. Think of it as “rent now, maybe buy later.” You rent the home like normal, but part of your rent (or a separate fee) can go toward the future purchase price if you decide to buy.
But How Does It Work?
In a lease option, both parties sign two agreements. One option is a lease for a set period (usually two to three years) with an option to buy the property later at an agreed price. The tenant pays an upfront “option fee,” usually between 1% and 5% of the home’s value, to secure the chance to buy it later. This fee doesn’t get refunded, but if the tenant moves forward with the purchase, it reduces the final agreed-upon sale price. The good thing is that a lease option doesn’t trap the tenant into buying, unlike a rent-to-own deal. When the lease ends, they can choose to buy the home or walk away.
During the lease, the tenant rents the property as usual, and sometimes part of the rent is credited toward the future purchase, working like a savings plan for a down payment. When the lease term ends, a tenant can choose to buy the home at the agreed price or walk away if they choose not to purchase or can’t secure financing.
Lease Option vs Lease Purchase: Know the Difference
Sometimes, people confuse lease options with lease purchases. Oftentimes, they refer to this as rent-to-own. This is because the two involve someone renting a home with the goal of buying it later. The main difference, though, comes down to commitment. A lease option gives the tenant more flexibility. However, with a lease purchase, they lock in the agreement to buy once the lease ends. Let’s look at how they compare side by side:
Feature |
Lease Option |
Lease Purchase (Rent-to-Own) |
| Obligation to Buy | Tenant has the option to buy — not required | Tenant is obligated to buy after the lease ends |
| Type of Agreement | Two contracts: a lease and a separate option-to-buy agreement | Usually, one combined agreement that includes a purchase clause |
| Option Fee / Deposit | Upfront fee (typically 1–5% of the property’s value); non-refundable, but applied to the purchase if the tenant buys | Often part of the down payment, applied to the purchase price, but may also be non-refundable |
| Flexibility | High — tenant can walk away after the lease term | Low — tenant must complete the purchase |
| Risk for Tenant | Loses the option fee if they don’t buy | Significant Risk: Tenant must complete the purchase or typically forfeits all accumulated option fees and rent credits and may face legal/financial penalties. |
| Best For | Renters who want to test the waters before buying | Buyers who are committed but need time to arrange financing |
Why Investors Use Lease Options
There’s a good reason why many real estate investors find lease options appealing. They give investors a smart balance between able to earn their rental income and planning for a future sale.
For landlords, a lease option can attract reliable tenants who care for the property because they might one day own it. Often, for them this means they have fewer maintenance issues and a more stable rental period. And that’s not all. Additionally, the option fee provides the investor with upfront cash while retaining ownership of the property.
Another big advantage you likely will find flexibility. If the tenant decides to buy at the end of the lease, the investor sells the property without needing to list it or pay real estate agent fees. But if the tenant walks away, the investor keeps the option fee and can lease the property again. Even better, they can do this at a higher price. This is especially true if the market has gone up.
For investors who like low risk and steady returns, a lease option can be a win-win. It creates predictable rental income now, while keeping the door open for a profitable sale later.
The “Sandwich Lease Option” Strategy
For some investors, the flexibility of a lease option opens the door to even more creative strategies. One of the most popular is called the “Sandwich Lease Option.” It takes the same idea of renting with the right to buy, but adds a clever twist that allows investors to earn from both the rent and the sale.
A sandwich lease option is a creative investing strategy where the investor acts as the middle person between the property owner and the final tenant-buyer. It’s called a “sandwich” because the investor is literally in between two agreements — one with the seller and another with the tenant.
Here’s how it works:
- The investor first leases the property from the owner with an option to buy it later at a set price.
- Then, the investor leases the same property to a tenant-buyer, also giving them the option to buy — but at a slightly higher price.
Your profit will come from the difference between the two deals. The investor collects rent from the tenant that’s higher than what they pay the owner. Later, if the tenant decides to buy, the investor earns from the price difference, too. It’s a win-win for you on both ends!
For example, imagine this: the investor agrees to buy the property from the owner for $200,000. However, they offer it to the tenant-buyer for $230,000. So, they can make money both from the monthly rent spread and the $30,000 price difference when they get to the sale.
Investors like this strategy because it lets them control properties without owning it outright.
However, it does require you to have good negotiation skills, a clear contract, and an understanding of local laws to make sure everyone’s rights are protected.
Pros and Cons of Lease Options for Investors
Let’s now look at the pros and cons of lease options. That way, you’ll have a clear understanding of what you’re getting yourself into before trying this strategy.
Pros |
Cons |
| Low upfront cost – You can control property without buying it outright. | Complex contracts – Lease option agreements can be tricky and require legal review. |
| Steady rental income – You earn monthly rent while planning for a future sale. | No guaranteed purchase – The tenant might choose not to buy, leaving you to start over. |
| Potential appreciation – If property values rise, you can sell at a higher locked-in price. | Property management duties – You are still responsible for major structural maintenance and repairs, though lease option contracts often shift more minor maintenance duties onto the tenant-buyer. |
| Attract motivated tenants – Tenants with a future ownership goal usually take better care of the home. | Market risk – If the market drops, the fixed sale price could work against you. |
| Flexibility – You can repeat the process with new tenants if the initial tenant decides to leave. | Possible vacancy periods – If a tenant doesn’t buy, you may face downtime before re-leasing. |
Let’s Simplify Your Lease Option Strategy
In short, lease options give investors flexibility, steady cash flow, and long-term potential, but they can also bring a degree of uncertainty. Still, when used wisely, this strategy opens the door to many opportunities for growth and profit. The key is to work with professionals who understand both the rental and legal sides of these agreements.
At Bay Property Management Group, our team understands the careful balance that comes with managing lease option agreements. We assist investors with everything from finding reliable tenants to maintaining compliance and strong communication. Our goal is to make property ownership and management easier while helping you protect your investment. Contact us today to learn more about our property management services and how we can support your investment goals.
