So, what is a master lease agreement in real estate, and how it can benefit both the buyer and seller? I will give a real-life example of this master lease agreement that you can use to understand the game better.
Professional real estate investors use it to get the following from their investments:
- Constant cash flow
- Big appreciation
- No maintenance headache
- Can do anything on the property and
- Easy closing opportunities
We will come to these benefits, but first, we will learn what a master lease is and how it works.
Table of Contents
- What is a Master Lease Agreement
- How Does a Master Lease Work in Real Estate
- But Why Will the Seller Agree?
- Advantages of Master Lease for Buyers
- Advantages of Master Lease for Sellers
- 7 Important Steps That You Must Not Forget
What is a Master Lease Agreement
A master lease is an agreement with the option to purchase an income-generating property at a later date at a fixed price that is determined today without paying any downpayment or involving any bank loan written in the contract. Here, both the buyer and the seller can benefit from a master lease agreement.
Here the owner of the property will have no responsibilities over the property. It means even though the owner still technically owns the property, you, as an agreement holder, have the permission to modify and manage it for a period of time.
You can renovate the property, add some extra value to it, and charge higher rents from the tenants for the higher-quality space. You have full control over the property. Like you own the building unofficially.
How Does a Master Lease Work in Real Estate
The working process of a master lease agreement may vary in every country, but most countries follow the below steps.
1) The Lease Agreement
In an income-producing property, the buyer signs a lease agreement of his building with the owner by paying a small or NO down payment.
He is not buying the house right now but paying at a later date with a fixed price that is determined today. If the buyer can not make payment on time, he will lose the property and all of his money with it.
2) The Right to Use the Property
The buyer receives the privileges and rights to use the property in his way. It is done through Equitable Title rather than a Legal Title, which the seller retains. Legal Title is used for selling, not for lease. Remember that.
Plus, you also receive an option to buy the property at a set price in the future if you want to. But you must make the complete payment as promised within that day, no matter what. Otherwise, the owner will take back control of the property.
3) You Are A Tenant Now
You must pay regular lease payments like a tenant until the purchase date. Like a normal tenant, you will receive all profits after subtracting the regular lease payments and expenses. Plus, you will receive all tax benefits from the property.
4) You Have Become Responsible for Everything
Now, you are responsible for managing and maintaining the property. You must pay utility bills, annual insurance premiums, and property taxes on time. That is your responsibility.
Although you have permission to add value to it. You can increase the property value with some required improvements resulting increase in tenant rents that flows directly to your pocket.
5) Time to Become A Legal Owner
If you use your option to purchase, you will receive a Legal Title to the property at closing before the date that is finalized. You will become a legal owner of the building.
In simple words, a lease option gives you the option to use and buy the property on your terms. You can use it to make payment time by time and also generate income from it.
But Why Will the Seller Agree?
Because he wants to get rid of the property as soon as possible. And he does not have many buyers. Plus, he can get his property back if you dont make payments on time. That’s a plus point for him.
If you offer them a lease agreement that will solve their problems most owners might say yes. It is not certain that he will agree, but if the owner has some trouble in his personal life, he might agree. It’s a 50 – 50 chance.
Advantages of Master Lease for Buyers
There are many advantages of a lease agreement that a buyer gets, and those are as follows.
1) Good Cash Flows
You will receive monthly cash flows after paying the monthly master lease payment and all other expenses. Plus, you can operate the property in a way that may increase your cash flow.
2) Capital Appreciation
As the property appreciates over time or you have added something to it, that has forced the property to increase its value. That way, you can raise rent and receive a better cash flow from the property.
Plus, you can buy the property below market price as discussed in the agreement, which says, I will buy the house within the next five years with a fixed price of $900,000.
If the house increases in value to $1.5 million in the next five years, you will make $500,000 as a capital gain. Because $900k for purchase and $100k for improvements.
3) Financial Benefits
Here you can avoid paying a down payment while still receiving most of the benefits of ownership. It is useful for investors who have insufficient money to purchase the property. Because the buyer doesn’t need a loan, the master lease agreement works without a bank.
Advantages of Master Lease for Sellers
It is a win-win situation. The seller also gets some advantages from this lease agreement. Those are as follows.
- The seller receives monthly lease payments as income.
- No headache in managing the property.
- Closing the deal is quick and inexpensive.
- The seller can easily take back possession of the property if the buyer defaults on the master lease agreement.
That is why most property owners agree to a lease agreement because they know how to take the property back if the buyer can’t make payment.
7 Important Steps That You Must Not Forget
If you want to make the investment securely without any disputes, then follow these steps.
- Hire an attorney for the master lease agreement, as each state has its own Contract Law and Real Estate Law that should guide the lease agreement.
- Hire a title company for a title search of the property to ensure the seller has a clear title.
- Hire a holding company to take possession of the master lease agreement document.
- Make records with a good agency that the property has a master lease agreement.
- Get an appraisal report for the property.
- Decide on the exit strategy. How will you exit from the master lease agreement? Consider all the options for the exit and choose the best one.
- And lastly, hire an escrow company to deal with all the payments.
If you follow these seven steps with caution, your master lease agreement will become successful. Your plan will also work without any legal disputes.
Look, I am no expert here. Please, discuss all these with a qualified lawyer before making more guesses. So now you have an idea of what is a master lease agreement and how to use it for your profit. I wish you the best of luck. See you soon. Thanks for reading. Bye!