One of the most awesome strategies to use as an Apartment Entrepreneur is a Master Lease Option. Lease options are common place in the quick-turn “pretty house” arena, but lease options when used on single family homes don’t reflect anywhere near the profit potential that is really possible using this powerful piece of creative financing. When you move from single family to multi-family in your use of the lease option, the risk/reward tilts dramatically in your favor and your profit potential shoots straight up, in hockey stick style increase.
When applied to a multi-family property, the lease option becomes a “master” lease option. The distinction is you are leasing from an individual party, the Seller, but have the right to sub-lease to multiple parties, the Tenants. Hence you have the “master” right to sub-lease … Master Lease Option.
All of the benefits associated with a lease option you have heard about, apply to the Master Lease Option as well:
- less risk; you are not taking title, the deed, mortgage, and tax bill stay in the Seller’s name.
- less money required down; option consideration is at a maximum 5%, but often closer to zero.
- no qualifying; no 3rd party has to approve you, this financing is between you and the Seller.
- fast close; how long it takes to get a title search done and the agreement drawn is how long it takes to close, anywhere from a few days to a month at the outside.
- easy exit; if after running the property for 6 months or so you realize the deal is not as good as you thought it was and you want out, it is simply a matter of canceling the agreement with the Seller. In case of default, the Seller simply cancels the agreement for you and just keeps the option consideration as his/her sole remedy.
- control; you get all the benefits of managing and profiting from the property as though you own it, by merely controlling it.
- huge profit potential; you get an option to buy the property at a price based on what the property is worth today, that spans years into the future, allowing you to increase the value of the property over time and then sell it based on its new increased future value.
When the lease option becomes a Master Lease Option though, there appears another dimension that adds two or three more zeros to a deal’s profitability.
That is, unlike single family homes, apartment buildings are valued based on the income they produce. The value of a property with 30% vacancy and below market rents is dramatically lower than if it was 90% occupied with tenants paying market rent. For mid-sized apartment properties in the mid-west this difference can be in the hundreds of thousands of dollars. For larger apartment complexes in high dollar markets, the difference can be millions.