Sandwich leasing generates income: options create wealth
Posted On April 7, 2021
Those of you who are disgruntled landlords probably cannot imagine having tenants with an average residency of more than ten years. I have had two tenants who have lived with me for over 20 years. A tenant paid twice for his house. I don’t work very hard. I typically see the exterior of my homes once a year when I do a cursory check to make sure the exteriors are being maintained. Good tenants only get token rent increases. On the other hand, poor maintenance is rewarded with high rent increases accompanied by a note explaining why residents will pay more for repairs and landscaping if they don’t. If they stay, my rent increase is a form of “paper training” to improve performance. If they leave, they will have done me a favor. Reflecting the good and bad performance of tenants in rents works wonders. Even with annual rent increases of $ 1000, I did not lose any tenants due to the quality of the neighborhood where my rent was located and the freedom of interference that I gave them. Unlike many landlords, my homes are well maintained and even after increases my rents are competitive. Also, unlike many landlords, I treat my residents with respect as I would treat any employee.
Being able to attract long-term residents opens up two fundamental ways to use “Sandwich Leases” to obtain two different types of profits. The newcomer without a lot of cash or credit can negotiate to lease a higher priced property in a better area that would make no sense as a rental if their purchase had to be highly leveraged with a conventional loan. A “sandwich lease” is nothing more than a basic lease that contains a provision for the tenant to sublet the property. When approaching landlords for a sandwich lease, it’s important to make a good impression. Be neat, neat, and convey a sense of dependability. Even though, by renting your property, you will be solving a financial or administrative problem, you are still asking them to entrust your home to you. One lady, who was nervous about renting her pristine home, agreed to do so only if she could approve the tenant I chose. That worked fine for me. No money was owed until your approved tenant paid me his. When you can sublet it to a long-term tenant, you are virtually guaranteed trouble-free income for years.
Another use of the Sandwich Lease is for the investor, who does not like management, to transfer these tasks to another in exchange for some of the gross income. An eager young man formed a management corporation that managed homes for homeowners through a “performance sandwich lease.” You only pay 90% of the rent you charge your subtenant, minus your out-of-pocket operating costs. Pass the additional costs on to your subtenant. Earn several thousand dollars each year doing this. Sandwich leases can be magical when combined with a Credit for Purchase Options.
When it comes to ownership options, there are all kinds of variations that can be used to solve specific party needs. For example, wealthy sandwich tenants may pay homeowners more than what is collected in subleases in exchange for a credit against the purchase of a home. For example, a person can obtain a 150% credit against an option price for each payment to the owner that exceeds market rents. Or, one could opt for a house that needs a lot of repairs in exchange for a percentage of the profits when the house is fixed up and sold. Instead of buying a pre-foreclosure and leasing the property with a Purchase Option to the previous owner (which is a true no-no); have the landlord transfer the property to a trust that you control. Let the owner occupy the house. Allow the Trustee to use Option payments to cure any loan defaults and keep payments current until you exercise your Option.
You can opt for high-equity pre-foreclosures by offering to pay distressed occupants monthly rent payments in exchange for a portion of the estate. For example, suppose a house of $ 300,000 has a mortgage of $ 200,000; But, due to the layoff, the owners could only make $ 1500 of the $ 2500 payment. You can agree to provide the missing percentage of the payment (40%) for a corresponding percentage of ownership (40%) of the house. Where else could you buy the equivalent of a $ 120,000 home already occupied by a happy resident with no down payment and $ 1000 per month?