Listen to the Podcast Here:
About This Episode
Episode #316b – I’ll show you 2 often-overlooked techniques have been my secret to low-risk, low-money-down real estate success for over 2 decades.
Episode Transcript
[00:00:07.600]
Welcome to the podcast, Real Estate Investing with Coach Carson. I’m your host, Chad Carson. You can also call me Coach, and this is the show to help you get out of the financial grind so you can do more of what matters. Today, I’m going to talk about a low risk, low money down technique to buy real estate that nobody is talking about. Yet it’s been one of the most powerful ways that I’ve bought real estate over the last 21 years. I’m going to unpack it. It is the topic of master leases and lease options. Today I’m again talking with Michael Zuber. I was on his show, One Rental at a time. He’s allowed me to share it with you here on the podcast. Really quickly before we start, if you get any value out of this podcast, I have a quick request. It’ll just take you a few seconds, but would mean the world to me. One of the most important ways that I spread the word of the show is when people read reviews. So if you have a few seconds, leave a review on Apple Podcasts, Spotify, and let people know what you like about the show.
[00:00:59.050]
They read those. I guess how they find out about it. It would mean the world to me. I really appreciate it.
[00:01:03.760]
He’s back. Folks, we have Coach Carson. He’s just my boy. I call him Chad. You can call him Chad or Coach Carson. Chad, we are talking about some very important creative financing things that frankly don’t get the press that they deserve. Sub2 is really sucking the oxygen out of the creative financing space, and it is what it is. But there are some other things like lease options or even master leases that we should at least understand. I thought who better to give the audience a framework of what those are. So thank you for being here.
[00:01:39.840]
Yeah, it’s great to be here, Michael. Love talking all things real estate, but creative financing in general is a lot of fun.
[00:01:45.710]
Absolutely. Well, why don’t you start with master leases first? What are they? How can they be used? And give us some frameworks and if you can, some examples.
[00:01:54.910]
Yeah. So the context again is the typical toolbox of financing as you go get traditional from a bank. Master leases are one of those unusual tools. A lot of people don’t use, but in commercial real estate they’re used a lot more often. Basically think about the concept that you rent a house. We’ve all rented a house before, rented an apartment. Normally you can’t sub-lease it to somebody else. You have to go ask your landlord to do that. A master lease just means you rent it from one from the property owner. You get permission to sub-lease it to somebody else, and we as investors make the spread. It’s also called an arbitrage. It’s basically controlling… You can think about real estate. Real estate has all these benefits. You can slice these benefits up. Well, all we’re doing is slicing the cash flow or the income benefit of this entire real estate pie. We’re saying we just want the cash flow with the master lease. We don’t have to have the ownership. We could have the ownership. We could talk about that, but we don’t have to. You can just make money from the cash flow of the property.
[00:02:47.450]
The other person still owns it. You make the difference in between.
[00:02:50.640]
Yeah, I think a great example of a master lease done right, because again, we live in a very crazy world where there’s a lot of people not doing it right. But there’s this concept that really picked up over the last couple of years called Airbnb arbitrage, which, if done correctly, is a master lease. You go to the landlord, full disclosure, you get the insurance, you get all these things, telling them what you’re going to do. That is a master lease you are signing and then you are controlling the other side and renting out by the day or the week of the month.
[00:03:22.140]
100%. That’s one of the best use cases because you’re adding value to real estate. This existing landlord had a long term lease. Maybe they’re getting $2,000 a month as a long term lease. You come in there and lease it from them for 1,500 bucks. They’re like, okay, I’m not having to manage it myself. And then you lease it for 3,000 bucks on Airbnb and you make 1,500 bucks in a spread. That’s the general idea in that example. But that’s a great example. If I were an Airbnb upstart, I would be doing those instead of going out and spending $500,000 and getting a bunch of debt. I would do arbitrages all day long and maybe mix some ownership in a little bit. But man, it’s risky putting your name on and getting, putting a huge down payment and maybe you don’t have enough money. So when I started doing Master Leases and also its cousin, Lease Options, which we can talk about, I didn’t have a lot of capital. So this is a way for me to use 100 % leverage, sometimes a tiny bit of down payment, an option fee or a master lease deposit, but it’s a tiny bit of money in.
[00:04:21.000]
But you’re using an enormous amount of leverage without a lot of risk. Because on a master lease, I could promise to pay you, Michael, two years of lease payments, but that’s the extent of what I’m promising you. I’m not promising to buy this property. I’m not promising to pay back a debt of $500,000. It says it’s an interesting way to control your risk using a contract instead of just to go out and borrow the money.
[00:04:43.250]
Yeah. The beauty of a master lease, when I look at them. Again, doing them correctly is… I think Airbnb arbitrage, when again done correctly with the master lease, is a great example because most of the time you’re renting, think of it as a vacant storefront. Then you’re coming in and you’re adding your special sauce. It’s the furnishing, it’s the service, it’s the game room, it’s the whatever. You’re adding value to a vacant storefront and then you’re reaping the rewards. It is a business. It’s a service based business. It is a lot less capital intensive, although furnishings aren’t free. But I think Airbnb arbitra is done with a master lease is a great business. I particularly am annoyed with people talking Airbnb arbitra that don’t talk master lease, because then what you’re basically doing is you’re being a bad actor. You’re not getting permission. That could be canceled in a moment’s notice. There’s all kinds of ways. I know plenty of people doing it the wrong way, but getting a Master Lease upfront, fully blessed, fully approved, it’s a lot less capital intensive. Frankly, it’s a great business if you do it the right way.
[00:05:54.740]
Yeah. I think this brings another part of the conversation what’s cool about Master Leases. This is a negotiation tool, and you can do this entire real estate business. I know this is how you run your business, Michael, and teach people how to do it. You can do it above board. You can do it 100 % transparency. And you can do it with… Real estate is one of the ultimate win-win transactions. I have done master leases with people who own properties, and I use it as a negotiation tool, and they were very happy with it. Like, Yeah, I want to keep owning the property. I want to keep getting cash flow. You can test that when you’re negotiating people, you can offer them this test. You might want seller financing, you might want subject-to, you might want something else. You could test it with a master lease and say, Why are you selling this? What if I were able to just pay you some rent next month? You didn’t have to deal with the tenants. You didn’t have to do any of that. What if I were the person who rented it from you and I promised you that I’d pay you for the next two years?
[00:06:46.600]
I’d pay you this amount of rent. If you just didn’t have to deal with the tenants at all. It’s a test close where you’re saying, Hey, would you do that? And you’re saying, Are they selling because they don’t like the hassle of the property or are they selling because they need the money? And if they responded to you and said, No, I don’t want any more income. I need this money because I want to go buy this boat and I want to do this thing, now you know. But it’s a pretty cool, simple, test close. You can just explain it in layman’s terms. And sometimes they’ll be like, Yeah, if you can just get me the income, that’s what I want. But I don’t want to fool this property anymore. You can start with a very low down payment entry into the property, and then you can grow from there and say, Well, what if we… Okay, so you’re saying you want more skin in the game? Well, let’s talk about a seller financing scenario. Maybe I could pay you $10,000 down and I’ll make you the same payments, but I’ll be more responsible for the entire property.
[00:07:38.890]
There’s a host of conversations that start, but I like starting with this lease option or a master lease conversation just to get the ideas rolling.
[00:07:50.460]
Well, let’s flip the script. We’re talking about Master Lease. I think we gave a great example of Airbnb arbitrage done the right way. But now let’s flip it over to lease option because that’s a little different wrinkle, a little different animal. Why don’t you talk about that?
[00:08:07.290]
Going back to our example, remember, real estate has all these benefits. You can get cash flow from it. The other big benefit we often talk about real estate is appreciation or growth. You never know when that’s going to happen. But man, if you’ve owned real estate for the last 5, 10 years like I have, and you have, or 20 years, you’ve benefited a lot from growth. The thing is that you don’t have to own property in order to benefit from the growth of real estate. You just have to control it. I think it was Rockefeller or somebody said control everything, own nothing. Own nothing, yeah. Yeah. Well, how do you do that? You do that with creative contracts, an option contract. Now let me explain it real simply. Just like the master lease is a little bit just a variation on a lease. An option contract is just a variation on a purchase contract. It’s a different type of purchase contract where it says the buyer, me in this case, I’m an investor, I give something a value, typically a deposit, like a non-refundable deposit, let’s say a few thousand bucks, and the seller gives me something in return.
[00:09:01.900]
They give me the right to buy this property at a certain price for a certain window of time. That’s the key. You’re controlling the property’s price. That window of time could start today and go for like three years later. It could start a year from now and then go for another two years after that. It’s very negotiable there. But the benefit for you as a person buying the property is again, lots of leverage. You’re controlling this property. Let’s say it’s a $400,000 property, a million-dollar property. Options are perfect for high-price properties. You can control a million-dollar property, maybe with a 3% down payment or an option fee. You have a $30,000 option fee that if this deal blows up, you lose 30,000 bucks. But what if it goes up by $200,000 and during that time period on your $30,000 investment, you made $200,000 and you’ve controlled your downside by having this option. And that’s essentially what it is. I can talk about some use cases, combining it with a master lease is how I’ve used it. There’s a hundred ways to use options, but the way I’ve used it typically has been either number one, with a seller.
[00:10:08.090]
I go negotiate with a seller. Like I mentioned earlier, I made a couple of different options, a couple of different closes. I could say I could pay cash for this property. They’re like, No, that’s way too low. Okay, well, let’s talk about another way. Maybe I can’t pay you $250,000 for this $350,000 property. Maybe you’re not going to take that. But what if I could pay you your price you’re asking, but give me time to buy it. Give me five years to pay you that price. I’ll pay you $10,000 today, and I’ll take over 100 % of the management of the property, and I’ll pay you $1,250 per month. That’s the master lease, right? And then I’ll pay you the $10,000 for the option to buy it for your price, $300,000 or whatever our number was that I just said for the next five years. Now, why would I do that? I like this location. I like this property. I want to manage it, I want to rent it or I want to have my manager manage it. But I think this property has potential to grow. I want to speculate. We say this a bad word typically, don’t speculate.
[00:11:05.090]
Like buy it for cash flow, right? And I agree. When you buy and you get a debt on the property, you should buy it for cash flow. But options are the perfect speculation tool because you can do… Let’s say you had $100,000 you wanted to invest in speculation. You could spread it out over three or four properties and speculate that those are going to go up in value. If the whole world blows up, you lose your money. But if the whole world goes up and you appreciate well, you can make a whole lot of money with a whole lot of leverage. And again, you’ve not borrowed that money, promised to pay it back. And so I did this early in my career as someone who didn’t have a lot of capital. I had to do this by talking to sellers, negotiating options. But another tool that I really love is I also did joint ventures with private lenders. I found these passive investors. Let’s say, Michael, you were selling a property, had a 10-31 exchange and that clock was ticking. I had this all the time. I would go to my investor friends and they’re like, I need to put some of my money somewhere.
[00:11:57.520]
I said, Well, I’ve got this property right here. You could buy it. And then I’ll lease it back from you with an option to buy it back for 10,000 more than what you bought it from me for. I would negotiate a $50,000 discount. I’d say, Hey, investor, come buy this property. I’ll lease it back from you. I’ll get an option for the next five years at 10,000 more than what you paid for it. And for them it was a, Oh, finally I found my 1031 replacement property. For me it was, I just got a private lender and I control the entire property with very little money by using an option. That just gives you a taste. It’s a very creative tool. You do the same thing you always do. You look for value, you look for good properties, you look for good locations, but you’re bringing this toolbox that has more tools that give you more options to do deals.
[00:12:43.870]
Yeah, one of the things that I hope people realize is I think we are going to go through a real estate cycle that was ’81, ’82, ’83, ’84. These were years where creative financing was born. Robert Allen did nothing down for the ’80s or whatever it was. I think today a lot of people are chasing the sub-to track, which is great. It’s its thing, but it’s one of the tools. It might be the biggest tool, but it’s still one of the tools in the tool belt. Thank you, Chad.
[00:13:06.840]
Thank you, Michael.
Help me reach new listeners on Apple Podcasts by leaving us a rating and review! It takes just 30 seconds. Thanks! I really appreciate it!
Get My Free Real Estate Investing Toolkit!
Enter your email address and click "Get Toolkit"
Leave a Reply