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I found a house where I would like to propose to the owner a Master Lease.
I’ve never done one of these before, so I could use some guidance.
The owner just moved to a new home and has never before had a rental property. His contractor is acting as his tenant “screener”, and so far they’ve had inquiries from people with large families and pit bulls. Not what he was hoping for in a tenant.
1. Do I offer a monthly payment amount with a long term lease? If the owner is asking for $770/mth from a tenant, how much should I offer to pay as a Master tenant?
2. How long of a term do I suggest? two years with one year options thereafter? Something else?
3. Do I ask for a Purchase Option with the Master Lease? I’ve often heard it’s common to pay 10% over market price for a Lease Option, but that was before the current market conditions. Any suggestions?
Thanks so much for your help!
The great thing about the master lease with option is you can control the cash flow and future profit without being the owner of record and eliminating risk. Deal with only good quality pretty houses as they will rent faster and have less maintenance. The master lease is in the position of lets say a middle man, clearing house or coordinator between the owner and the sub tenant.
The Rent – You could rent from the owner at one price and rent to a sub tenant at the fair market rent price. A safer way would be to rent at say 10% or $100 off of what you collect (more if you can get it) so if you have a month vacancy you will not have to owe the homeowner. Payment to the homeowner would only be made out of what you actually collect minus your fee. You have to find out why was the homeowner not able to attract good tenants will you be able to do a better job? The rent may have to be priced slightly below market to attract good tenants because of all the other houses that are on the market. You will have a lease with the owner for say 1yr with the right to renew every year. Then i would have a month to month with your sub tenant. Clearly state in the leases who is responsible for repairs the owner for major repairs because it is there house still and sub tenant handles minor repairs.
The Option – You and the homeowners goals will decide what kind of option you may get. The longer the option you can get the better to allow time for the mortgage to pay down and hopefully for the house to appreciate. You lock in the purchase price today while you are searching for a buyer or getting your tenant ready to buy. Your not obligated to buy if you dont want to or you could sell the option to someone else.
Good luck and happy investing.
Deb
Watch the videos my David tilney in Landlord section of THE DEPOT — they will answer all your questions.
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