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.