The other day I was reading a forum discussing myths in real estate investing. One of the contributors said the phrase “it doesn’t take money to make money” is the biggest myth in real estate investing today.
I disagreed with the contributor from the standpoint of personal experience; Ashley and I had no money when we started. We were broke kids, straight out of college, with a ton on student debt. We were so broke that I would literally go door to door with my pressure washer trying to get enough work to put food on the table.
Despite our financial challenges, we knew that in order to have financial freedom, we had to become real estate investors. Being straight out of school with a ton of student debt and no W2 income presented an interesting conundrum. The only place we knew to get funding for deals was at a bank, but the banks wouldn’t touch us with a 10 foot pole. We had to find a different way.
If you’re new to investing and find yourself in a similar situation, let me give you a strategy that will start putting rental money in your pocket every month without requiring you to put any cash into the deal. The strategy is called master leasing.
Master leasing, sometimes referred to as sandwich leasing, occurs when you rent a house from a landlord for less than market rents with the right to sublease the property to another tenant for market rents. The difference between the two rents is your profit.
Here’s an example of one I’m working on right now. The landlord doesn’t want to be a landlord. He says it’s too stressful. That being said, he doesn’t want to sale the house and lose out on the tax benefits of owning rental property. Those benefits are payment enough for him and he just wants enough rent to cover the mortgage payment.
The mortgage payment on the house is $700/month. Market rents, however, are $1,000 a month. So if I sign a lease with him for the $700/month and rent the property out for $1,000, I’ll make $300 a month in rent.
Let me ask you a couple of questions: 1. How much money do I have in the deal? 2. How many of those would it take to replace your income? 3. Are master leases something you could do too?
You first question to me is probably, “How do I find landlords willing to do that?” Calling the number on all the “for rent” signs you see is a great idea. You’d be surprised how many landlords would love to give up the thrill of management.
Making calls on “for-sale-by-owner” signs is a good strategy, too. In today’s market, if a house isn’t being listed with an agent, that may be an indicator that the homeowner doesn’t have enough equity to pay an agent’s commission. Wouldn’t it be better if you rented the house for a few years until their mortgage pays down enough to make the sale? The first master lease Ashley and I did was born out of that exact situation.
Let me caution you on something. When you’re marketing to obtain master leases, don’t call yourself a property manager. In Georgia, a property manager is someone who oversees other people’s property for a fee, and they must be a licensed real estate agent. When doing master leases, you’re a master tenant, receiving rent, and have no fiduciary duty to the property owner. That isn’t the same thing as being a property manager, so don’t masquerade as one.
If you’d like to learn more on how to get into master leases, I highly recommended taking a course from David Tilney. His style and systems are simply amazing. To find out more, visit his website at www.davidtilney.com.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.