The Sandwich Lease Strategy for Low Cash Rental Investing

You’re looking at two pieces of bread with money in the middle. One of those bread slices is you leasing a home with an option to buy from a motivated seller. The other is you placing a tenant-buyer into that home on a lease-purchase or rent-to-own basis. That’s the simple two sentence definition, but let’s look at this niche strategy in detail.The Acquisition Side

You want to find a motivated seller who, for whatever reason, hasn’t tried or been able to sell their home but needs to move. Maybe a recent better job offer has created an emergency situation for them. Maybe they are just close enough in loan to value ratio that they can’t sell and cover the closing costs with commissions.Whatever the reason, you find a home with characteristics you like for a rental, and the homeowner has a payment that is lower than the property will rent for. So, what do you do to get control of this home without actually buying it and hopefully without a bunch of cash out of pocket?

It’s a lease-purchase or rent-to-own deal that you propose to the owner. They need to move, and they don’t see a sale soon enough for their needs. You offer to lease the property with an option to buy it, perhaps with a 3-year lease. The major thing to remember here is that you will be creating a lease-purchase agreement with the OPTION to buy the home at the end of 3 years, but not the OBLIGATION to buy.You set a fair purchase price at the end of the period that will cover their mortgage and be as low as you can get them to take. Perhaps they have a home worth $187,000 now with a $169,000 mortgage. They can’t sell and make closing costs. You offer to pay them $187,000 on or before the 3-year period ends. It’s an option to buy, not an obligation.You offer to pay their mortgage payment as your lease payment, and that includes insurance and taxes in escrow. The lender sees no change in ownership. They get to move and not have a payment, and you get control of the home. For this option to buy, you offer them a $2,500 non-refundable option fee. They like it, because it’s going to help with moving expenses.The Tenant-Buyer Side

Now, you place a tenant buyer into the home. They want to own a home but right now can’t come up with the down payment or they have credit problems they need to resolve before they take out a mortgage.You create the same document on this side, only they get the option to buy on or before the 3-year lease expiration. You negotiate a lease payment that covers the monthly mortgage payment and lease you’re paying plus some positive monthly cash flow. The price they will pay for the home is something over what will be owed on the mortgage in 3 years, your sale profit. It’s whatever you can negotiate. They’re willing to pay $2,500 for this option to buy, so you’re coming out roughly cash flow neutral for both sides.The Big Picture

If your tenant buyer decides to buy, they exercise their option to buy at your profitable price. You then exercise your option with the owner/seller. You have collected positive cash flow throughout the lease, and you get the profit on the sale at your two closings.This is not a strategy for everyone, nor for every market. But, when you can do this in your marketplace, very little or no cash is needed to take a position as the sandwich maker, low risk, and you walk away with great profits.

What if your tenant buyer doesn’t exercise their option or moves out? You simply don’t exercise yours and walk away. Or, you can install another tenant and roll the leases into new ones. It’s hard to find a negative in this type of investment deal.