What Is a Sandwich Lease?
A sandwich lease involves leasing a property from an agent who, in turn, is leasing the property from the owner. They allow investors to operate in real estate markets while deriving potential rental income and engaging in flexible property acquisition routes, even without substantial initial capital. Effective communication and negotiation skills are keys to successfully executing a sandwich lease.
Key Takeaways
- A sandwich lease involves a lessee leasing the same property to a third party.
- This strategy can be profitable for investors with low capital and leasing experience.
- Key risks include financial costs and extensive negotiation and management efforts.
- Sandwich leases are appealing when property owners prefer rental income over immediate sale.
- The lessee in a sandwich lease may have an option to buy the property later.
Navigating the Mechanics of a Sandwich Lease
A sandwich lease refers to a situation in which one party leases a property from an owner, and subsequently leases that property to another party. A sandwich lease is seen by some as an advantageous strategy for low-capital investors to gain a foothold in real estate markets, as it is possible for an investor to initiate a sandwich lease with no money down, and without the involvement of a bank.
This strategy, however, can be a risky and labor-intensive undertaking. For prospective investors who do need bank financing, it may be worth looking into the best mortgage lenders in a given area.
Investors looking for sandwich lease opportunities need to be savvy communicators and negotiators, first to identify and establish a lease agreement with a property owner, and second to identify and establish an agreement with a lessee of their own. In addition to the investment of time required to make sandwich lease profitable, it is not uncommon for the middle party to also put sweat equity into the property through maintenance and property management labor.
Important
A sandwich lease is a lease in which the lessor (landlord) of a property is also a lessee—leasing the property from the initial owner.
Practical Example of a Sandwich Lease
Alice, a homeowner, is having trouble selling a house she no longer lives in because of a slowdown in the real estate market in the neighborhood. Alice is under no financial pressure to sell this house and is not interested in renting it out and acting as a landlord.
Brynne proposes a sandwich lease deal to Alice, offering to lease the home for five years with the option to purchase the home at any point during that lease at a defined price of $200,000.
Alice agrees to the deal, which requires Brynne to pay $1,000 per month in rent. A portion of this monthly rent, $200, will be applied to the final purchase price if Brynne decides to purchase. Additionally, Brynne agrees to pay a one-time option fee of $2,500 to initiate the agreement, which will also be applied to Brynne’s purchase price later on.
Brynne, in turn, establishes a lease agreement with Carl, who moves into the home. Carl is also interested in leasing to own this house, and so his five-year lease agreement bears some similar characteristics to Brynne’s. Carl, however, leases the house for $1,500 per month with the option to buy the house for $250,000 any time before the five-year period ends.
Similar to Brynne’s agreement, $200 of Carl’s monthly rent is applicable to the later purchase price. He also pays an option fee of $3,000, which can be applied to his purchase price if and when he chooses to purchase. When Carl finally purchases the home after five years, Alice makes her full price on the property, and Brynne profits on the difference.
What Is a Sandwich Lease Purchase Option?
A sandwich lease purchase option gives the initial lessee (the person in the middle of the sandwich lease) the option to purchase the home or property at a certain price within a certain time period. This allows motivated sellers to find a potential buyer while still earning a rental income until the option is exercised.
What’s the Difference Between a Sandwich Lease and a Sublease?
A sandwich lease is similar to a subleasing agreement, in that both involve one party leasing a property and then re-leasing it to another party. But there are some key differences: in a sublease agreement, the initial tenant is simply assigning part of their interest and responsibilities in the lease to another tenant, usually because they will not be present for part of the lease duration. A sandwich option is primarily aimed at real estate investors, with the end goal of ultimately selling the property.
What Is a Master Lease Agreement?
A master lease agreement is a leasing agreement that gives the lessor the right to sublease the property or part of the property during the agreement. For example, a person might lease a house, and sublease different rooms or apartments in that house to different sub-tenants.
The Bottom Line
A sandwich lease allows a person or company to lease a property from the owner, and then lease the same property to another tenant. This arrangement can be attractive to some real estate investors as a relatively low-risk way to earn rental income from a certain property. Being successful requires negotiation skills.