Investing in real estate is a timeless trend that never loses its flair. Because the value of real estate tends to increase over time, it’s obvious why buying and selling homes continues to thrive as a profitable investment venture. Real estate deals generate profits that can range anywhere from a couple hundred bucks to over a million, depending on the deal.
For the most part, making real estate deals is reserved for those with a license. However, there is a way you can invest in real estate without a license and turn a profit—legally. It’s called a sandwich lease and it consists of two lease agreements with you, the investor, in the middle
How the “Sandwich Lease” works
- You find a house for sale that still has equity, and sign a lease with the owner giving you the option to buy the house at the end of your lease. You also make sure the lease secures your right to sublet the property because that’s how you’ll make your cash.
- You find a tenant in the market for a rent-to-own deal, and sublet the house to them under a separate lease and rent-to-own agreement just between the two of you. They pay you a non-refundable fee that secures their right (but not obligation) to purchase the home from you at the end of their lease. They move into the house and pay you monthly rent, and you use that rent to pay the owner, according to your lease.
When it comes time to close your deal with the homeowner, you buy the house, and then resell it to your tenant.
While the sandwich lease option is a fairly profitable way to invest in property, there are some cautions to follow.
Always be honest with the owner
The sandwich lease strategy isn’t just a clever way to flip homes without anyone knowing. Don’t tell the owner you’re going to be living in the home when your intention is to sublet to a tenant and resell the home. Be as transparent as possible so everyone is on the same page.
Screen your potential tenants
Pass on tenants with poor credit who aren’t likely to qualify for the loan they’ll need to purchase the home. If you accept a high-risk tenant, even if they want to buy the house, you might get stuck with an eviction and have to find another buyer.
- Pay the mortgage for the owner whenever possible. You don’t want to end up in a surprise foreclosure because the owner pocketed the money instead of giving it to the bank.
Being licensed isn’t necessary (but gives you extra protection)
Making money with a sandwich lease is perfectly legal without a license, but there are some precautions you should take.
Whenever you put a buyer and seller together in real estate, it’s considered brokering. And brokering without a license is a felony.
When you enter into a sandwich lease option as the middleman, you’re not technically brokering a deal. You’re buying a property, subletting, and then reselling it to your tenant. And this is perfectly legal as long as you keep a tight watch on your paperwork, and don’t try to make deals on the side by connecting buyers and sellers for a percentage of the sales. You do need a real estate license for that.
A sandwich lease will appeal to homeowners when:
- They need to move out on short notice.
- They’re dealing with personal or family issues out of state.
- They don’t have the time to hire a real estate agent.
- They have been laid off, or have to transfer with their job.
A sandwich lease will appeal to buyers when:
- They want time to build their credit to get a better interest rate on their loan.
- They don’t have enough money for a down payment to buy a home.
- They want the ability to save money long-term before purchasing a home.
- They want to live in a home for a while before they commit to buying it.
The investment potential of a sandwich lease
Real estate investing comes in more packages than just buying, renting, fixing, and flipping. Most of those options can be fairly high-maintenance. The sandwich lease option is a low-maintenance way for you to find interested buyers before you even own the property you’re going to sell.
As long as the tenant chooses to buy, your investment will pay off well.