Middle Class Millionaires

After my recent article on how real estate creates wealth, I was challenged by a student to illustrate how someone can produce income with real estate. This would of course be easy, however, the individual extending the challenge made it a little more difficult (but not much) by adding the requirement that my example would require that he not own the real estate himself. Dare I say that this is a piece of proverbial cake? Here’s an easy way. It’s called the Master Lease.

A master lease is a document that leases to the lessee (not the owner, she’s the lessor) the right to possession of a property. For our example lets say it is an entire large warehouse. The lessee pays a more attractive price per-square-foot for the space than individual smaller space users would because the lessee is taking the entire facility and thereby simplifies the headaches and hassles of the owner (lessor).

The lessee in possession then sublets the space to a variety of individual smaller users at a higher per-square-foot price and thereby reaps the benefit of the spread between his cost and his higher rental rates received. Depending on how this type of relationship is negotiated and structured, this can produce a significant cash flow to the original lessee. This business model can be used with residential, commercial, storage, land, or any other real property. You could literally rent a small home (with the right to sublet) then rent it out at a higher rate and keep the difference. Yes there is the risk associated with the lease obligation for the lessee, however, if you are confident in your ability to sublet a property and manage the renters or tenants thereafter, then this technique can be very profitable. I know of individuals who rent properties using long-term leases from out-of-state owners and make the majority of their income from subletting them. The out-of-state owners have their property leased, little headache and no management concerns. The lessee has the cash flow and sometimes … here’s a great add on, … they have an option to buy the property at a specific time in the future and at a specified price. Under this scenario a lessee can increase the income of a property and control expenses such that the value of the property increases well over their option price. In this way the lessee literally builds their down payment over a few years and is able to finance 100% of their purchase price, which may be for our example only 70% of the then appraised price, if they choose to buy the property. If they choose not to buy, they can still do a simultaneous purchase and sale of the property to another buyer (at the appraised price) and earn the equity build up for themselves. We could go on forever, but that’s enough for today.

We wish you the best of luck in your professional endeavors. If we can help in any way let us know. Have a great day.