Control and Profit Without Debt or Ownership with a

From information provided by David Tilney

Control and Profit Without Debt or Ownership with a

M a s t e r L e a s e

If you’d like to invest in real estate, but you can’t afford to buy property or just don’t want to take on a lot of debt – don’t despair! Think about renting your rental properties from owners who may be distressed home owners or housing providers that need help in managing their properties or maybe just an owner that wants needs to do something with a property but they want it back later.

Think about a sandwich or Master Lease.

A Master Lease (ML) is a lease from a landlord to a tenant, followed by a sublease by the tenant to another sub-tenant or occupant.

There are many different reasons to put a master lease into play and because you can be very creative in what you want to do. Traditional Landlords might acquire single family homes and then sublease them to traditional tenants. A business that needs space for their business might lease more space than they need and sublease the extra space for extra income. And when Airbnb became the hot new way to invest in real estate, master leasing became the way to acquire properties for short term rentals.

There are two types of master leases with as many hybrids as there are owners with different needs. A performance master lease requires the master tenant to pay a percentage of the funds he receives from his sub-tenant only when he receives those funds. A fixed lease, on the other hand, generally requires the master tenant to make payments even if he does not have a sub-tenant. In the first scenario, the owner takes the risk of only receiving rent when the master tenant receives rent from his subtenant and the owner also agrees to pick up most expenses associated with the property. In the second scenario, the master tenant takes on more of the owner’s responsibilities and risks thereby entitling him to a greater profit (or loss) depending upon his success of maximizing net income from the sub-tenant.

Many people are more fearful of executing a long-term lease as a master tenant than they are of buying an investment property. I think this is an irrational fear since it is easier to terminate a lease than it is to get out of title, especially when you are the one who has created the documents. As an entrepreneur you can negotiate any and all aspects of your master lease – the variable or fixed rent amount, the term, the liability for expenses, escape clauses, etc. The key is to draft your documents by design based upon your negotiations with the owner rather than by default (i.e. using a dime store contract). In your sandwich position between the owner and your sub-tenant you seem a little like Dr. Jekyll and Mr. Hyde. Your lease with the owner is pro-tenant since you are a tenant, but your lease with your subtenants is pro-landlord since you are their landlord. In today’s marketplace you cannot always generate positive cash flow for owners, but you can lose them less than they are currently losing with a vacant, unsalable house.

I have found that if you “under promise and over perform” in meeting the terms of your lease with the owner, you will become the person that he or she wants to do business with if the property becomes available for sale. The master lease is the way to get your foot in the door for future negotiations; it is rarely the final negotiation. Real estate is a business built on relationships. A master lease gives you the opportunity to build the relationship that leads to future purchases and often owner financing. Don’t make the mistake of thinking that your master lease is the final negotiation. It should be the first negotiation that can lead to one or more future negotiations.

Master leasing is an incredible tool, which can benefit both owners and investors.

Master get to ‘test drive’ properties that they might later have the opportunity to purchase. Some properties have physical, locational or neighbor issues that won’t be discovered until after a tenant is first acquired. Leasing and sub-leasing the property initially could save you a lot of grief and money that you could better use elsewhere.

Master leasing can provide many of the benefits of ownership without many of the risks. A longterm lease, which is secured to the property, will control the sale and/or refinancing of that property. You get to profit with out taking on the debt or expending a lot of capital. Much less risk than owning should say the values drop. You can borrow money against some of your more valuable master leases.

As a master tenant, you will not usually be liable to replace large property components, like roofs or furnaces. Every dime that you pay to the owner can either be expensed as rent or amortized over the term of the lease. Rental income derived from master leasing is passive income, as defined by the IRS, and not subject to selfemployment tax.

Join David to learn more at the MAREI Meeting on the 13th.