Lease Options
At CashFlowDepot.com you can learn how to use a real estate lease to control cash flow and a real estate option to control equity. Put them together and you control the property without ownership.
What is a Master Lease?
www.BusinessDictionary.com defines a master lease as a “controlling lease under which a lessee can sub-lease a property for a period not extending the term of the master lease.
Never have I seen a better time to master lease houses. Owners can’t sell and buyers can’t buy; landlords rule. Now is the time you can become a landlord without taking on a debt or investing a lot of money. Owners who have moved and needed to sell must now lease their mortgaged homes if they hope to avoid foreclosure. This is an opportunity for entrepreneurs who know how to manage and maximize bottom line rental income.
I can’t think of any other situation where you can produce a good income stream without a capital investment. Sure you can work for income, but jobs are not plentiful these days and if you’re not working, the income stops. Not so with master leasing where the sub-tenant must make payments whether you are unemployed, hospitalized, on vacation or sleeping.
There are two types of master leases with as many hybrids as there are owners with different needs. A performance master lease requires the master tenant to pay a percentage of the funds he receives from his sub-tenant only when he receives those funds. A fixed lease, on the other hand, generally requires the master tenant to make payments even if he does not have a sub-tenant. In the first scenario the owner takes the risk of only receiving rent when the master tenant receives rent from his sub-tenant and the owner also agrees to pick up most expenses associated with the property. In the second scenario the master tenant takes on more of the owner’s responsibilities and risks thereby entitling him to a greater profit (or loss) depending upon his success of maximizing net income from the sub-tenant.
Many people are more fearful of executing a long-term lease as a master tenant than they are of buying an investment property. I think this is an irrational fear since it is easier to terminate a lease than it is to get out of title, especially when you are the one who has created the documents. People also think that they may have to be licensed under their state’s real estate brokerage law to engage in master leasing. Usually this is not true. Licensing is generally required for property managers (with few state exceptions) because managers have a fiduciary relationship with their principal. This is not the case for master tenants who are not agents of the owner, but entrepreneurs working in their own self interest and are principals in the transaction.
Generally managers can only compete on price, personality and scope of service when competing to pick up business. As an entrepreneur you can negotiate any and all aspects of your master lease – the variable or fixed rent amount, the term, the liability for expenses, escape clauses, etc. The key is to draft your documents by design based upon your negotiations with the owner rather than by default (i.e. using a dime store contract). In your sandwich position between the owner and your sub-tenant you seem a little like Dr. Jekyll and Mr. Hyde. Your lease with the owner is pro-tenant since you are a tenant, but your lease with your sub-tenants is pro-landlord since you are their landlord. In today’s marketplace you cannot always generate positive cash flow for owners, but you can lose them less than they are currently losing with a vacant, unsalable house.
It makes good sense to secure an option to buy the property at the same time that you sign your master lease as long as it does not change your cash flow. I have found that a long-term secured lease without an option often acts as a stealth option, since the owner must negotiate with you to remove your lease from the property when refinancing or selling. A master lease in many ways allows you to test drive a property before deciding whether or not you might want to buy. I have found that if you “under promise and over perform” in meeting the terms of your lease with the owner, you will become the person that he or she wants to do business with if the property becomes available for sale. The master lease is the way to get your foot in the door for future negotiations; it is rarely the final negotiation. Real estate is a business built on relationships. A master lease gives you the opportunity to build the relationship that leads to future purchases and often owner financing. Don’t make the mistake of thinking that your master lease is the final negotiation. It should be the first negotiation that can lead to one or more future negotiations.
If you are looking for a way to build cash flow today with little risk….look no further. Master Leasing is it!
What is an Option?
Many readers of this letter may not be able to use either seller financing or investor financing to buy houses because of lack of investors or sellers who would be willing to provide financing. But, by using Options, they can buy, sell, and hold houses without the cooperation of either investors or sellers.
In virtually every market, Options can be used to create very high yields primarily because they can be obtained for about 1% - 3% of a property’s value. They can share both in future appreciation and loan amortization. Options are perfect investments for Pension Plans or IRAs because of their high leverage and risk/reward ratios. Or, they can be sold immediately to provide current cash flow; or held for 12 months, then Exchanged tax-free for other Options or for real estate. When you consider all the ways Options can be used, it stirs the creative juices.
Suppose you sold a house by buying an Option to provide the down payment. Later you could sell the Option for cash, or Exchange it for a share of the equity on the same house you sold, or another house. By doing this, you’ll have helped the buyer buy a house with nothing down; so it would not be unfair for the person who bought the Option to be able to cancel it in return for half interest in the house. Think of the opportunity for investors, Brokers, CPAs, Attorneys, Financial Advisors, IRAs, etc. to be able to build future equity starting with today’s extremely low prices without any cash investment other than the funds, or services, they contributed for the Option. Let’s take this a little further:
The highest paid skill in real estate today is to discover and tie up property at a bargain price; thus earning either a fee or share in future profit. By combing neighborhoods and the Internet to find owners willing to walk away from their equities with a Short Sale contract, a lot of money can be made. A few weeks ago, I entered into a Short Sale contract with a seller for half of the MLS listed price. I met him at his garage sale. Unable to sell, he was cleaning out his house and leaving the State. If the Short Sale is approved, I can wholesale my position to an investor before I have to pay anything. Or, I might sell for my actual cost and retain an Option to buy one half of the house back for one half of the cash paid.
By using Option techniques, you won’t need to go into debt to make money with houses. Here’s how: Using investor cash, for finding and buying a house at a big discount to value, doing any necessary repairs and either reselling or renting it, in lieu of a fee you should demand half of all profit. One person has been doing this for years; steadily building net worth without using any of his cash at all.
There are a lot of websites out there maintained by mortgage lenders, mobile home lenders, HUD, FNMA, Freddie Mac, and Auctioneers that are loaded with billions of dollars of unsold and foreclosed inventory that can be contracted for with very little cash. Up to $35,000 in FHA 203K loans are available for houses that need rehab. Some sites show opening bids and prices; all of which can be severely discounted for cash. Some of these websites are easily found, and some less well- known web address are closely guarded secrets. Nonetheless, diligent entrepreneurs have found these sites and are making a lot of money by contracting to buy houses they list, then getting cash investors to split the profit with them. If you aren’t investing almost every waking hour finding ways to take advantage of today’s market, you’ll have missed one of the greatest opportunities of a lifetime.