I was 25 years old and had a handful of rentals. My goal was to buy as many rentals as I could and live off the cash flow. For any of you that have tried this, you know that it almost never works that way. Rentals are a great way to invest for your future, but a very difficult way to replace income. I know this because even though I had several rentals, I was still broke.
Because I was broke and had no income to speak of, I was not able to come up with down payments or qualify for loans. Knowing the career of my dreams was well under way, I had to find ways to make it work. I had to buy more property.
I came across a seller that had a four-plex that he was sick and tired of managing. He tried the professional property management route and was frustrated with the results. I was able to negotiate a lease on all four units with the right to sublease them out. I promised to cover vacancies and maintenance if I was able to get a monthly lease payment low enough. The deal came together and I did a master lease on that little four-plex, which I still control today. It is not a lot, but I make between $3,000 and $4,000 a year and have the right to buy it at a locked in price when I am ready. The price that I have locked in is about $100,000 under market value. I did this with no money out of my pocket and no bank loans.
The master lease is typically used on much larger commercial properties than my little four-plex. However; it can be a tool for almost any type of property and has some tremendous benefits including:
- · It is a great way to get in with little to no money and very little risk.
- · It is a great way to benefit from rents without actually owning the building.
- · It is easy to negotiate and easy to understand.
- · It is typically a great alternative with the ability to benefit everyone involved.
If you do decide to get into master leases as an investing strategy, I would recommend you always try to get an option to buy the property with the deal. That way you can capture the appreciation of the building you are managing, but take no risk if it loses value. Once you have an option, you will have the right to buy the building to keep, buy it to resell or even assign your rights to another investor for a fee.
Right now is a great time to be utilizing this strategy because values and rents are on the rise. I just went through all my leases and found that over half of my properties are rented below market. I have been frantically trying to get my rents up to keep up with the market. Many owners lose track of market rents. They are more concerned with other things to keep up on it. I have found this to be especially true with investors that are ready to retire. This type of owner is the perfect prospect for the master lease because you can offer them what they are currently getting and take away all the hassle of managing the property. That is a good deal for them. Once you have control, you can raise the rents, increase the value and start enjoying the cash flow, and that is a good deal for you!