Sandwich Lease: Lease Option Investing With Little To No Money Out Of Pocket
April 4th 2008
The sandwich lease allows real estate investors to control a property with little to no money out of pocket. Investing in real estate is much more multifaceted than most are led to believe. While many novices understand the concept of equity investing they do not understand many of the other real estate investment options that are available. In fact, when one looks at the huge world of real estate investing it is somewhat surprising how many options are available to those looking to earn significant income in the real estate market. Yes, some of these investment strategies are a bit involved, but they are not complex. Such is the case with the “sandwich lease” investment strategy which involves subletting a lease while maintaining an agreement to purchase the property.
While this sounds a little complex it reveals itself to be actually quite simple when all the steps are broken down. The first step involves leasing a property with an option to buy. There are a number of ways this can work but here is one of the most common examples: you sign an agreement with a landlord to lease a property for five years at $2,000 a month rent with an option to purchase the property anytime during the five year lease for the current value of $300,000. If the property appreciates, you can capture that appreciation by exercising the option at $300,000.
With a sandwich lease another phase is added as the leaseholder rents the property out to a third party at a profit. That is, the lease hold is responsible for $2,000 a month rental payments but turns around and leases the property for $2,300. The leaseholder may even negotiate a higher priced option with the third party. In that case, should the third party exercise the option, the leaseholder would net the difference between the two sales prices.
Of course, there are potential problems that may develop and many of these problems may center on the third party to whom the property is leased. For example, if you are the leaseholder you will be responsible for any damages incurred by the individual to whom you have subcontracted the lease. If the third party damages the home it may depreciate in value. If they do not compensatie you for the damage you will be the one who is stuck paying the bills. This is the most common risk inherent with dealing with renters. Then again, there are also the potential problems of the third part not paying their rent, etc. This is especially risky with a sublease because you would still be responsible for making your lease payment even if the sublease tenant does not pay their rent.
While this is a generally simple concept for real estate investing it can become quite problematic under certain circumstances. So, never look at this type of investment – or any investment for that matter – as a sure thing. It is always a good idea to have an attorney review your contracts to help protect you as much as possible.
Under the right circumstances using a sandwich lease offers an opportunity to control a lot of real estate without needing a lot of upfront cash. Aggressive investors interested in leveraging their time, effort and energy (instead of cash) to profit in real estate, may well find that sandwich leasing is a desirable investment strategy.
A.M. Caro is a freelance writer from Southern California.
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