You’re interested in investing in real estate, but don’t have enough (or any) capital for a down payment. How do you get a foothold in the real estate market? Enter: The sandwich lease.
A sandwich lease allows you to lease property from owner, and then lease that property to another party. You are the peanut butter in this situation, sandwiched between the property owner and the tenant.
Let’s explore how the sandwich lease works, and whom it serves best.
Three ingredients for a sandwich lease
A sandwich lease is beneficial for the three people involved: the property owner, the tenant and you, the investor. However, the situation must be right for a sandwich lease to work to everyone’s advantage.
•First, the seller must be eager to sell the property. Perhaps the property has been having trouble in the market? Or they need to sell quickly to relocate out of town? With a sandwich lease, they’ll be able to move out of their home and avoid further payments.
•Second, the tenant who will ultimately moves in should be seeking a rent-to-own lease. These tenants want homeownership, but don’t have enough for a down payment or are working to improve their credit.
•Finally, as the investor, your role is supporting the others. You’ll relieve the owner of responsibility for their property and help the tenant achieve their goal of homeownership. In turn, you’ll receive payment for your efforts.
This situation won’t work for every investor. Investors looking to employ a sandwich lease need to be strong communicators. Supporting the other two parties also means negotiating and problem solving with them, requiring your time management.
You’ll also be serving as a landlord for the tenant handling rent, repairs and other tenant issues. What you save in down payment on your investment you may pay for with time.
A sample sandwich lease
Ben needs to relocate for a new job and is looking to sell his home quickly. He has strong finances, and is uninterested in renting the property. He simply wants the home off his hands!
After learning more about Ben’s situation, Lucy sees an opportunity to employ a sandwich lease. Ben’s home payment is low enough that Lucy can rent it to a tenant for more each month.
Lucy will lease the home from Ben for five years, with the option to purchase the home at any point for a set price of $250,000. Lucy covers Ben’s monthly mortgage payment of $1,200. She also pays a one-time option premium of $3,000 to secure the agreement. The option premium plus $300 from each monthly payment will be put towards the final purchase price.
Lucy finds Jeff, a tenant who wants to own a home but doesn’t have enough saved for a down payment. Jeff’s lease is similar to Lucy’s, allowing him to purchase the home after five years. Unlike Lucy’s agreement, his terms are slightly higher: Jeff pays $1,800 a month in rent, and the agreed-upon purchase price is $300,000. He also pays an option premium of $3,500, which, with $200 a month from his rent, is put towards his final purchase price.
Five years later, Ben realizes the full price of his home, Jeff now owns the home, and Lucy profits from the difference and her time spent managing the property.
Setting up your sandwich lease
Despite the opportunity, a sandwich lease can get tricky quickly. If you’re ready to get started with one, make sure you’re following the right steps:
•Locate a seller wanting to move quickly: Search houses that have been on the market for a while, or see what you can learn about recently listed homes. Avoid sellers eager to move for financial reasons.
•Lease from the homeowner: Create a lease establishing a rent-to-own agreement for you. You are now responsible for the home, and the owner is free to leave.
•Locate a tenant looking to own: Find a high-quality tenant committed to being in the home long term. Candidates may have credit issues; take time to vet prospective tenants.
•Execute a lease with the tenant: The terms of their lease should look similar to yours with the seller, albeit with different pricing depending on the profit you’re looking to make. Rates should be realistic and competitive with the area, but still worthwhile for your investment.
When the lease is up you’ll either profit from the tenant’s purchase or will be the home’s new owner, per your original lease.
If you’re looking to invest in real estate but don’t have enough for a down payment, a sandwich lease can help you reach your goals. It’s not for everyone and won’t work with every situation, but with strong networking, negotiation and a little patience, you can profit from your investment.