Investing in real estate still remains to be one of the best ways to earn extra income and attain financial freedom. However, not everyone has the capital for a down payment to purchase an income property. Fortunately, there’s one real estate investment strategy that allows you to invest in real estate with no money down. It is referred to as the sandwich lease strategy.
With this strategy, you can actually control rental properties and generate rental income without owning a home. While it might not work for every investor or every market, it can be a very profitable investment requiring less of your own money.
Imagine investing in real estate with no money and no credit. If this sounds exciting to you, keep reading to learn more about this strategy.
Related: What You Need to Know About the Minimum Down Payment for Investment Property
What Is a Sandwich Lease?
A sandwich lease is a leasing arrangement where a real estate investor leases the property from the owner and then leases the same property to another party who is looking to own a home in the future. In other words, the investor is both a lessee and a lessor. He/she pays rent to the landlord and also collects rent from a third party.
While the original lessee (investor) is not the real owner of the property, he or she acts as a landlord to the new lessee. The new lessee pays a fee that is slightly higher than what the investor pays the landlord thus allowing him or her to make a small profit.
A sandwich lease can be combined with a lease with the option to buy whereby the lessee creates an option arrangement with the lessor. The lessee then sets up a sandwich lease with a third party who has an option to buy as well (at a slightly higher fee).
The original lessee can exercise his or her option to buy whenever they desire. When the new lessee exercises the option to purchase, the original lessee will have to exercise the first option to be able to sell the property to the new lessee. This makes selling a property before you own it possible. It’s called a sandwich lease option because you are in the middle.
Related: Lease to Own Option and It’s Pros and Cons for Buyers and Sellers
When Is a Sandwich Lease Ideal?
A sandwich lease can be an ideal real estate investment strategy for a beginner real estate investor who wants to get into the housing market but doesn’t have enough capital. You can start this real estate investment strategy with no down payment or without going through the traditional lending processes. You don’t have to involve a bank.
Sandwich lease options often happen in a seller’s market because many first-time property buyers get priced out of the market and are forced to be renters. This strategy is one of their best options to enable their first purchase in such a real estate market.
How Does a Sandwich Lease Work?
There are two steps to making a sandwich lease work for you.
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Find a motivated seller
The process of initiating a sandwich lease begins with you finding a motivated seller. You need to locate a seller who needs to move from the property quickly but, for one reason or another, has trouble selling the property or doesn’t want to lease it his/herself. You will be offering a solution to the problem by allowing the seller to move out of the home without having to worry about it until it’s time to sell.
However, you should keep in mind that not all landlords allow sandwich leases. Even those who allow them may have some restrictions. Therefore, it’s important that you learn how to pitch a sandwich lease option to a seller to increase the chances of getting it accepted.
The viability of this strategy will depend on the seller’s equity in the property, the going rental rate you can set, and the price you are likely to sell it for after a specified period (3 to 5 years). You’ll sign a lease-purchase agreement that gives you the option to purchase the home from the owner in the future at price agreed upon in the contract.
After the agreement, you’ll make the agreed-upon monthly payments. They should be low enough to allow you to reasonably charge the new tenant a higher rental rate and generate a monthly profit. This means that you should have researched the local rents. Visit Mashvisor to take a look at rental comps.
Related: How to Find Rent to Own Homes for Investment
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Find rent-to-own buyers
As you look for a motivated seller, you should also advertise for rent-to-own buyers. You are looking for people who want to purchase a home but can’t do it now because they lack a down payment or have poor credit. Therefore, they are likely to be interested in a rent-to-own option. Once you find one, you sign a lease-purchase agreement that is the same duration as the one you have with the property owner.
If ready, the new tenant has the option to purchase the property before the contract expires but at a higher price than the one in your contract with the owner. When the property sells, the difference between the two prices outlined in the two contracts will be your profit.
You now have an income property generating monthly positive cash flow. You are also guaranteed to make a profit in case the new tenant exercises their option to purchase when or before the contract expires. Even if they don’t, you can execute another agreement and continue earning monthly cash flow.
If you can find profitable properties whose owners are comfortable with sandwich lease options and tenants who are interested in a lease to purchase option, you can make multiple investments without cash.
The Bottom Line
The sandwich lease option strategy can be a great way to make money in real estate without having to use your own money. If you don’t have enough money for a down payment to purchase a cash flow property, you should definitely consider this low-cash investment strategy. However, this strategy usually involves many legal risks that come in ways that are not so obvious to many. Therefore, before you make up your mind to adopt this real estate strategy, take the time to explore the various risks.