02 Jul INVESTORS’ CORNER: What is sandwich leasing?
The term “Sandwich Leasing” means just that – two slices of bread (leases) with you in the middle. Really, it is quite simple. The two leases are created essentially for one purpose; to generate a net monthly cash flow to you for your efforts. Here is how it works.
Your profit (cash flow) is the spread between the income and outgo (rent paid out by you plus any operating expenses.) You are in the middle and it is up to you to control both the Master Leasehold interest (your lease with the property owner) and the sublet tenant. From day one, you must take control and maintain complete control of the sandwich position throughout its tenure
Say you found a nice three-bedroom, two-bath house in a nice neighborhood that is on the market for $125,000. To buy the house, you would need either $125,000 cash. If you didn’t have that, you would need to finance the house with a down payment anywhere from 5% or $6,250 to 20% or $25,000. You would also need closing costs ($2,000 – $4,000). You would need time to line up the financing. That would take anywhere from 30 to 60 days.
Now take the same house and determine its retail rental rate. It may rent for $1,200 per month. But right now it is sitting empty, with a faded and rather forlorn “For Sale by Owner” sign swinging on one hinge. You look the house up in the public records and see that the owner bought the house five years ago for $115,000. Then you check the (public records) and see that he has a mortgage on it with a note for $100,000 at 6% interest which works out to about $600 per month. Add in property taxes and insurance and you have the approximate amount that house is costing its owner each month, say $900.
What if you went to that owner, chatted with him, found out what his needs are, and, if it looked like a good fit, suggest leasing his property from him at $900 per month. He’s not going to make any money, but now he isn’t kissing $900 good bye every month. You do some clean up, turn around and rent the property just under market value at $1150 per month. You make a net profit of $250 per month ($3000 / year). What if you had 5 or 10?
JC Underwood is a director at the Metrolina Real Estate Investors Association, which provides education, mentoring, and networking for real estate investing in the Charlotte region. He can be contacted at jcu@MetrolinaREIA.org. For more information, visit www.MetrolinaREIA.org.