Is a master lease a good strategy?

Is a master lease a good strategy?

 

The very first rental property Ashley and I ever managed was a little three-bedroom, two-bath house on Kids Drive up in Dalton. At the time, we lived in Villanow, and Dalton was a place we frequented. It was also a place that we did a lot of door knocking trying to find deals, which is how we found the house on Kids Drive.

 

When we came across the house, we noticed it was for sale by owner, but that it was vacant. The owner was maintaining the yard and had put some staging in the house to make it appear lived in, but we knew better. We called the number on the sign and got a voicemail. That’s when Ashley whipped out the best marketing piece that we have ever had.

 

Would you like to know what it is?

 

It was a handwritten note in Ashleys girly handwriting that said, “We love your neighborhood, and we love your house. We would like to talk to about buying it. Please give us a call when you can.” She then listed our name and phone number. We still use that marketing piece today because it gets us a call back almost always.

 

And it did on Kids Drive, too.

 

Our seller’s situation was that they were upside down in their house. Now, this was 2011, and they had purchased in 2008. That meant they’d bought high, and now their value was low. They had recently taken a new job toward Atlanta and had moved to be closer. In the meantime, they were driving up every weekend to cut the grass and keep eyes on the place.

 

When we sat down with the seller at the kitchen table, you could tell they were tired. Not only were they driving a lot, but they were paying a lot too. The had two house payments, two utility payments, two insurance payments and the list goes on. This was stealing from their energy as well as their pocketbook.

 

After looking at the value, there was no equity in the house for us to flip it and make a profit. And their mortgage payment was too high for us to buy subject-to and rent for a positive cashflow. So, we offered to master lease the property for $100 less than what we could rent it for.

 

And if you don’t know, a master lease, sometimes called a sandwich lease, is where you rent a house from an owner for less than market rates with the right to sublease. You then rent the house out to an occupant who pays you market rents. And the difference between that payment and your rent to the owner is your cashflow.

 

This strategy was very beneficial to our sellers. Because we were going to install a tenant in the property, they no longer had to pay for all the costs mentioned above. The tenant would pay for those now. They also didn’t have to spend their weekends driving hours to cut grass. And they were very excited about that.

 

But what about Ashley and me?

 

If you’ll notice, we created a positive-cash-flowing rental property that we didn’t own. And since we didn’t own the house, costs like repairs to the property were not our responsibility. They were the owner’s, and that was a very good thing for two newbies who had very little money.

 

We also didn’t have to worry with vacancies. You see, our master lease was a performance-based lease. That means we only paid the owner rent if we received rent. So, since we didn’t own the house, if it went vacant, paying the mortgage payment was not our responsibility, either.

 

Taking off all the financial pressure of owning real estate, and still getting paid rental income made this strategy a great way for us to learn how to be landlords. And we did learn a lot on that house.

 

So, is master leasing a strategy you can use today? You bet! We still do it, and it is much more profitable these days with the increase in rents. We have one where our rent to the owner is locked in at $1,000 a month, and we rent the house out for $1,500. That means that house gives us a pure $500 a month in cashflow. Not too bad for not owning it, right?

 

If you’re interested in learning more about this strategy that’s low risk with the ability to create passive income quickly, go to www.davidtilney.com and check out David’s online Hassle Free Property Management and Master Lease seminar coming in September. He’s a great teacher, and his method will have you fully prepared to do your first master lease after you finish the three-day class. You will be glad you did.

 

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.

 

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