Master Leasing -The Safest Way to Get Started in Real Estate (and a great way to acquire property)
In 1978 a good friend of mine got me to joint venture with him on the purchase of my first single family investment property in Colorado Springs. We continued to buy several other houses and a fourplex together. We hired 3 different management firms to run our small portfolio. Sadly, all three firms failed miserably, which forced me into the management business by default.
Initially I just managed properties I owned or in which I had an ownership interest. Eventually I expanded and took on others’ properties to increase income and help cover overhead expenses.
As the business grew, I quickly became aware that the toughest part of property management was not dealing with tenants, but dealing with the property owners who would eat up my time and increase my stress with questions and suggestions about their properties. It was difficult for them to understand that only one of us could manage their property.
In 1984 I stumbled onto a better way to do business.
I had a good friend with a problem house he had taken back through foreclosure. He wanted me to manage the property; however, I had very little interest in doing that. Over lunch in one day, I offered to lease his property from him for 35 years at a fixed monthly amount with the right to sub-lease the house to others.
This is an example of a master lease. I told him that if I wasn’t making $1,000 per month spread on the rents by the end of the lease, then I had made a terrible mistake to have made the offer.
Surprisingly, my friend, a licensed real estate broker, agreed to accept my proposal and that transaction changed my real estate life and the lives of many others who currently master lease houses all over the country.
in October of 1996 I cancelled all my management agreements and leased the properties I used to manage. At our high water mark we master leased over 100 single family houses. I found this gave me more control over managing the properties since owners only had the rights given to them in their contracts with my company.
I no longer had a standard template that I offered to property owners. Now I could tailor each contract to the needs of the owner and keep whatever real estate benefits, including cash flow, were left. If owners were averse to risk, I could offer to guarantee rents and the payment of expenses up to a stop-loss. If they were willing to accept some risk for a higher return, I could lease and sub-lease their property on a performance basis.
I could also guarantee a base rent and a percentage of the rent received above that amount if it better met their needs.
I no longer offered a ‘one size fits all’ rental contract but tailored each transaction to the individual owner’s needs. Leasing houses allowed me to ‘test drive’ houses to see how they performed as rentals prior to determining if I might ever want to own them. It also allowed me the time to gain the owners’ trust by doing more than I said I would do in our business arrangement. It ended up being a wonderful way to acquire equity or title to properties I liked with favorable terms.
Master leasing allows the master tenant to deal with properties he or she may not be able to afford to purchase but which make great rentals. It also gives them protection against getting caught in an economic downturn like 2008 to 2010 when many investors lost their properties and ended up being forced out of the real estate business.
Master leasing is what we have suggested our kids and others to do to get started in this business. It has worked well for many, since little or no capital is needed to produce positive cash flow using someone else’s property.
Opportunities appear when you solve others’ problems, and a vacant house can be a huge problem for most people!