Master Lease and Property Management Model

[Michael Temple]

This past weekend I was at a real estate seminar which I love going to both to learn from the instructor and meet other investors. I met a fellow student that had one of the most interesting business models I have ever heard of...

He would find property owners that wanted a property manager and rather than become the property manager he would actually master lease the property from them and then sub lease it. He charged a flat fee each month and returned the rest to the owners. Now this by itself is probably not that unique. What is unique is how he manages the tenants. He writes up a lease and tells the tenants they are responsible for EVERYTHING except the A/C and roof. Anything else goes wrong in the house they just pay to fix it and don't call him.

I had never heard this before and thought maybe he had only done this a couple of times or something, but he said he has 50 houses at different economic levels and does it with ALL of them and has been for years! He said for some of the lower dollar units he might pay for the repairs upfront and then bill it back to the tenant over a year as an addendum to the lease as a rent increase until the repair is paid off, but the tenant is still paying for it. He said he doesn't provide or cover appliances.

I was so dumbfounded at this that I asked him how he did it. He said without exception he gets first and last months rent plus something he calls a "performance deposit" which is equal at least 1 month's rent. He says if they don't "perform" to the lease, i.e. don't fix something at their expense he will pay for it and remove the amount from this deposit.

He said he gets almost no phone calls from tenants because they just take care of this stuff on their own. He did say on occasion he had some move out rather than repair something, but he would just keep their performance deposit.

I am just wondering if anyone has ever heard of something like this or what you think of it.

[Michael Temple]

@Mark Ainley I completely understand the skepticism, I was, probably to a degree still am, filled with it myself. I was more intrigued by the fact he was able to push off so much responsibility to his tenants. As a buy and hold guy myself and realizing my least favorite part of this gig is having to deal with all the little repairs that come up this sounded amazing. It is true, I have no idea how long he has done this for or how sustainable it is over the long haul. My primary reason for posting it here was to see if anyone else had heard of it or done it.

@Marc Rice Yes, that was my understanding. As he is technically the one in the lease with the owner he would be responsible for paying if there is a vacancy. Pretty much the same as any lease/option agreement would be. In fact, this sounded a lot like a lease/option arrangement in many ways minus the option part.

@Nathan Gesner I wondered the same thing. As he was talking he sounded genuine and that this was an open arrangement with the property owners. He had a fixed fee he charged so when he paid the rent to them he subtracted out his fee. Just based on that I would have to guess the property owners knew what they were getting into. To be fair, I had never met this guy and other than our conversations I didn't have any facts so the skepticism everyone is sharing is probably warranted. You know that old saying "if it sounds too good to be true it probably is" rings in my ears when I heard his story.

However even before I met this guy I had heard of this concept of master leasing, but I never bothered to explore it. My primary interest in his story wasn't so much the business he was doing, which wouldn't really interest me, but how he managed tenants and tenant issues.

Think about this, when you buy your own personal home and you finance it for 30 years with a bank you don't "own" it even though everyone uses that word. The bank technically owns it and will until you pay the very last dollar off in 30 years. Now you do have equity, but for most people that equity builds very slowly over decades and doesn't really start piling up until the last 10 years or so. In fact, for the first 5-8 years it is almost zero rather it is almost all interest and recovery of costs to purchase.

My point is if something breaks, you need a new stove, carpet gets old, etc. YOU are responsible for paying for that. You don't get to call your bank up and tell them to replace or repair that. We understand that this is the "cost of ownership", again there is that word ownership. Outside of the equity you build up your primary benefit you get is the enjoyment of living there and enjoying the property. Also, I am referring to SFH and not apartments for this example.

In a landlord/tenant situation most of us look at it differently. The tenant still gets what I consider the biggest benefit of home ownership which is living there and enjoying the property. Yes, it is true they get no equity, but we the landlord are completely responsible for fixing and maintaining everything to keep the enjoyment of living there at its maximum.

This guy, assuming he is telling me straight and it is sustainable, has turned this thinking on its head. That is what I found so interesting.