What often keeps residential investors out of a commercial investment property is the perception that a lot of capital is needed to get started. That’s not necessarily true when you use a master lease option to get into a commercial investment property.
The principle is that you sign a lease with an option to buy a commercial investment property. You then begin collecting rent from the tenants and pay your lease to the owner. Any difference between what you collect and what you owe on your lease is profit to you.While the master lease option isn’t completely zero down investing in a commercial investment property, it’s about as close to zero down that you’re going to get. The master lease option is the equivalent to the sandwich lease option in residential real estate.
Good Candidates for a Master Lease Option on Commercial Investment Property
A good investment property is often one with good potential upside that the current owner has managed poorly. Perhaps a 16-unit investment property with a 62.5% occupancy rate and the current rents average $125 below market value. Ideally, the investment property has been maintained so that you don’t need to spend money to make repairs. However, some times repairs are needed to get into a good master lease option for a commercial real estate investment property. If you have adequate positive cash flow, you can use the cash flow to make the repairs and any needed improvements over time. Either way, your master lease option needs to be for at least three years to give you time to improve the management of the property to add value.
In the example above, 10 of the 16 units would be rented at $550 per month when you took out the master lease option on the investment property. When you first take over management of the investment property, your monthly gross cash flow would be $5,500. If you fill 5 of the 6 vacant units over the 3 years of your lease option, you’ll have a 93.74% occupancy rate. You’ll also increase the rents by $125 per month to be on par with market rates. This increases monthly cash flow to $10,125. The $4,625 monthly difference in cash flow is profit in your pocket.
Your Profitable Options on This Investment Property
However, commercial investment property is valued based on cash flow. Not only have you dramatically increased the cash flow, you’ve created a big increase in the value of the property.
With the master lease option in place, you now have two profitable options to consider. First is exercising the option to purchase the investment property. The difference between the option price and the improved value is equity in your pocket. You’ll almost certainly qualify for a loan to purchase the property.
If you don’t want to continue managing the investment property or don’t qualify for a loan to buy it out-right, you still have an attractive option. Just like a residential lease option, you can flip your option to purchase this commercial property to another investor to take out the equity you have created.
If you want to work directly with me on this master lease option for a commercial investment property model or any of the other investing models that have proven highly profitable, please join me at www.wendypatton.com/theinnercircle.