Last time I explained how I used sandwich leasing to be able to hold rental houses without having to do the management by turning over my houses to experienced, successful managers who were managing their own portfolios and those of others.
There is quite a difference between picking a name out of the purported managers in the telephone book and selecting an experienced producer with a management track record to handle your rentals. I’ve found that managers who don’t actually own their own rentals aren’t nearly as careful with the way the spend money on repairs, advertising, etc. as those who are already seasoned landlords experienced in selecting tenants and holding costs down to a minimum.
There’s another real benefit to using property owners as managers: They already have a source of reliable labor and discounted parts and equipment lined up that they can use to keep your rentals in good condition. In a recent case, where a number of air conditioning contractors quoted between $4500 and $4700 to replace a unit, a landlord’s long time contractor did the same job with essentially the same qualify of system for $2000 less.
Now let’s look at sandwich leasing from the standpoint of the entrepreneurial manager:
Suppose the market rental for a house were $1000 per month. The manager who sandwich leased it would pass on $900 to the owner, retaining $100 for himself. If he were merely an agent who was being paid to manage a property, 15.3% of this would be subject to payroll taxes, but since he is being paid out of collected rents, this is not deemed to be earned income, but rather passive income not subject to payroll taxes; so he keeps the entire $100.
Suppose the Master/Lessee were able to obtain an Option to Purchase with 50% of the rents credited toward the purchase price, he’d be building equity at the rate of $500 per month in addition to reaping $100 per month income. Now, let’s get fancy: Suppose he in turn subleased this property to someone else without an Option to Purchase and let them keep the $100. He’d be controlling all appreciation and accruing $500 per month in equity on each house every month without any investment or effort at all.
Sound too good to be true. A quarter century ago I was an investor who was strapped with 31 houses in another State. I was approached by a local landlord and agreed to master lease my houses to him as described above and to share all net gain 50/50. After several years, over a couple of beers, he explained that he had done the same thing that I described above with a little variation. He kept all of the cash flow and gave away half of his 50% of the profit.
