Scenario #1. Ok, you find a home you like for $250,000 and a good interest rate requires 20% down to eliminate the escrows and insurance. Take that $50,000 and when you add a 1% origination fee, probably 2% interest points, survey, appraisal and closing costs, your payment on that now, $200,000 8% mortgage is going to cost you $1,467/mo. Once you add home insurance and taxes, you are upwards to 1800/mo putting your out of pocket around $55,000 and only $50,000 equity. Now it looks to me like you're already in the hole 5,000.

Now, lets take this mortgage a bit further, pay it out 3 years and you now have a pay down of the original loan to about $194,500. That puts your cash investment at about $55,500 and it doesn't take a rocket scientist to deduce that this is not a healthy return on your investment and therefore, not a good reason to purchase the home.

Now let's look at a lease/purchase situation with Scenario #2:
A familiar story might be the seller who has been transferred to another state and must sell or find a fast option to getting rid of their home that is worth, say, $250,000. There you are with a $250,000 offer to lease/purchase paying them $1,600.00/mo which will cover their mortgage and you ask for a going rent credit back of 25% to go towards your purchase price. You could even, depending on your liquid cash at the time; offer two more months rent up front that would also be applied to your purchase when you take the option later on. No more money or fees exchanges hands and you literally move in the next day. Say you have a three year option and with all costs considered ($3,200), plus rent credit ($400 x36=$14,400), your ROI jumps to 500% with a total of $17,600 in equity earned.

Now, this is not cash to you till you take your purchase option just like another equity scenario, but the difference here is that your could turn around and sell your lease/purchase option long before the end of your contract, like 6 months before or just sublease it out as you have total control of the property.

So, some of the pluses for lease/purchase are; no down payment, fees or closing costs, or just whatever extra you could afford to put down at the execution of the contract; your rent money is working for you at a reasonable rate of 25% or whatever you can negotiate, and in some cases, 100%; the price of the home is locked in, and you can even sell your option and move on yourself. IN regards to inflation, you would benefit both leasing and purchasing as the price is always locked in, but your rate of investment is higher with the leasing option.

Perhaps you would be fortunate and have picked an area that is still appreciating. If it only grows at a rate of 10% over three years, the house at $250,000 would now be valued at $275,000. The figures will show you that in purchasing your gain would be $30,500 (25k + $5,500) only 60% ROI but in leasing/purchase, your return would be $39,400 with an ROI of over 1,000%.

In contrast, should the market you bought in should drop 10% over that three year period, you would have severe trouble selling and the lease/purchase scenario would look no better. The difference is the losses would be considerably less. You walk away from ($3,200) and this could possibly be used on your tax return as a business loss. This is vastly more attractive than being stuck with a 30 year mortgage that could cripple you financially for years to come. You could also go into another investment without credit issues.

On a sideline here, you may be wondering what most people do about interest deductions on purchases. Yes, you would be saving $14,200 a year on your taxes but you forfeited the $50,000 up front money you used as a down payment that could be working for you on another investment. Who knows, the government could take that interest deduction away at anytime and you would still be stuck with a 30 year mortgage. If you took that $50,000 minus the $3,200 option money, $46,800.00 and loaned it out or invested it in another similar scenario the benefits would be stifling and more then makes up for the poor ROI in buying out right. Always keep in mind too, that if you can locate a good bargain, you can perhaps find a more motivated seller then in my modest scenario and negotiate an even greater deal for yourself. Keep in mind as you locate for that prime target property that the pricier homes work better in this type of financing situation as in the lower valued homes, the rent usually goes beyond the average bank payment.

This whole scenario is not only good for investment purposes but helps that buyer that has been searching for months, for their first home or maybe you just t to upgrade. The good news is that it is indeed a good time to purchase, but the bad news is that your credit score is not in the range that qualifies for a good interest rate. Because of this, your income level cannot support the payment. These buyers fair well in lease/purchases also, giving them time to repair and build their credit score and have the price of the home go down reducing down payment when the are ready and able to qualify for a mortgage through a lender.