Investing in Real Estate Without Banks Using a Master Lease Option

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“Great spirits have always encountered violent opposition from mediocre minds.”   – Albert Einstein

One of the perceived barriers to entry into the commercial real estate arena is the lack of capital. One really interesting tool to negotiate this barrier is the master lease option (MLO). While I am not advocating this as a zero down method, it is certainly a less intensive way to start.

The master lease option is the “Big Brother” to the sandwich lease in residential real estate investing. The principal is the same: you lease the property from the current owner and then turnaround and sub lease the property out. A master lease option is different from seller financing in that the title is not actually transferred. Instead, the lessor (the owner) rents the property to the lessee (you, the investor), and you in turn rent it out to all the tenants in the property.

So Why Would a Seller Do This Strategy?

Great question!

The common wisdom on this philosophy is that buyer’s motivation is necessary and is the core lynch pin. If you want to join me in the quest for a master lease deal, check out the advantages we can offer to the seller:

  • The management headache will become ours in a very short order. This deal can close very quickly relative to a financed transaction.
  • More flexible on option price we can offer more because they are flexible.
  • More default protection. Because this is a lease it will be a easier to take the property back – especially with an arbitration provision.

Okay it sounds great right? What are the risk if you’re a seller?

  • Counting on the performance of the MLO operator: why will they do a better job than you?
  • Forgoing the sales opportunity. The MLO operator then is really who your banking on!

However, there are also some risk to the MLO operator are also at stake:

  • How will you know the seller is making the mortgage payment?
  • What if you have a large capital expenditure needed? How will that happen?

How a Master Lease Option Works

Now that we have determined the pros and cons for all parties –  how will it actually operate?    The most common method I have heard of is setting the lease option payment equal to the existing cash flow; the MLO operator is therefore best served by acquiring deals that have a management upside. For example if the property is 60 to 70 percent occupied a great marketer can quickly run this up.

This is where it really benefits to be a skilled operator – because you can raise income or reduce expenses to make more money! Lets break it down in my example and assume we MLO a 15 unit property that has a value of $283,000 at 70% occupancy at 10% Cap.


We have learned some great tips from BiggerPockets and over time we have leased it up to 95% occupied. At a 10% cap rate, we CREATED value of $178,000 with a modest rent increase of $100 per unit over thirty-six months.   At that point, it’s probably pretty easy to get a commercial bank loan at favorable rates with that much equity in the deal.


Overall, Master Lease Options are another tool in the tool box for investors.  I will definitely report back when I score my first MLO win!

Have you ever used one? What was the experience like?

Photo Credit: Wasfi Akab

About Author

Douglas Dowell

Douglas Dowell J.D. is a commercial and multifamily investor. His blog will focus on legally raising private money, risk mitigation with due diligence and management science. He is also an avid student of success principles with a focus on modeling success factors.


  1. How do you market for these types of properties ?

    What happens if the seller owes several years of back taxes ?

    What your normal down payments for these types of deals ?

    Do you pay for an inspections or engineer report for these types of deals upfront ?

    • Douglas Dowell

      These are great questions:

      1. Back taxes. Depending on how much you can make this number a solution in your offer. Find a way to fix it for the seller and you will be a hero!

      2. Marketing: The best ways are networking or direct mail via list source in my opinion.

      3. Inspections: To me this is where your going to want to go with an eye ball test. The key is you will find out overtime if the property is an not bankable due to environmental issues. The cost of inspections are not really necessary imho,

  2. Can you explain the MLO operators equity is? Or is this just a given since its a LO. And in commercial would are the different parameters one would set on the MLO such as length of term, down payment, etc.

    So far, in the scenario it looks like you helped create value for the seller, but not yourself yet.

    • Douglas Dowell

      Great question Steve,

      This is where the negotiations for the option price come into play. I would set the option price close to what you are taking the property over at. That is indeed the current value.

      Why pay the seller for your operational talent? If you want the deal enough you may sweeten it to get it but it seems to me you need to be compensated for your time and talent. If the seller has an appetite to turn the property around we won’t trade on these terms anyway. Seller motivation of some level is a definitely required.

  3. I have been doing a little research on this topic lately but I haven’t been able to find too much education on this subject. I own 14 properties and am pretty much shut down by the banks (and out of down payment cash anyway!). I am interested in learning more, do you know of any good resources to get started?

    • I have not seen much out there myself. I would basically adopt the direct mail campaign that wholesalers use. It would not hurt to have a good real estate attorney draft you a master lease.

  4. So what is the exit strategy for this type of deal? I can see you improving the cashflow of the property, but once you fix the management problems and increase rent rolls, now what? In a traditional property, I would say you would sell it at the new valuation, but you don’t own it, so does that mean you sell the lease option in order to cash out? Also what are the lengths of the MLO terms, if I were the owner, I would just wait you out to terminate the ML and offer followon leases with the placed tenants. The owner has the building, you may have the tenants, but given enough time I can see someone taking advantage of your good management policies and strategies.

    • There are a few exit strategies Jason. You could flip your option to another investor if you decide you don’t want to own the property. You can exercise the option and purchase the property – possibly with owner financing or private money. And with the increase in value you would likely qualify for a higher commercial loan if you opt for conventional financing. Finally, you could just let your option expire. My MLO’s usually run, on average, 5 years.

    • Your option to purchase the property will protect your interest in the property. Its not a bad idea to record it so it would show in a title search if the seller was trying to circumvent. Like a residential lease the contractual rights protect your interest as well. Seller can’t just say “great job leasing it up” and take back over without some breach of the deal on behalf of the operator. I think overall, it seems most of these deals the seller is burned out anyway. The last thing they really want is to operate the property again anyway.

  5. Excellent summary of the Master Lease Option Strategy Douglas. As Rockefeller said “Control without ownership!” I think this is the best way for someone to get into commercial with minimum cash outlay and little to no risk. This is one of the strategies that I’ve been focusing on for the couple of years in my own REI biz.

    • Thank you for your great input Bill,

      I find the model extremely appealing! It seems like every other strategy with persistence and patience we can find the right situation for a win win outcome.

  6. I went to an investors meeting a couple of weeks ago where the facilitator discussed some deal structuring methods and he brought up the topic of lease options and subletting a property. I was so stoked about the idea, because I didn’t realize people made money this way: that is virtually making something out of nothing – freaking ingenious. I’m glad you had highlighted on this topic. Correct me if I’m wrong, but I noticed you said that you don’t have personal experience in executing a MLO strategy. So what has been your go-to guide/resource to acquire such knowledge? I mean from your account on this blog its sounds like you’ve done this before. Also, what does the 10% cap rate refer to?

    • Hello Frank,

      I have not landed my first deal yet but I am marketing for this strategy. I would say learning about this strategy is the mix for me is largely from work as a corporate lease agent for a cell phone company, my short stint as a apartment building manager, The Steve Burgess book on how to buy and sell apartment buildings and learning from experience investors like Bill Walston and Sharon Vornholt (direct marketing aspect).

      I guess I need to write a book on master lease options hahaha. I would also read Frank Ginellis book on 36 key financial measures to get up speed on the math of commercial real estate.

      The 10% cap rate is a good ball park on what a c class apartment building would trade for and be valued by. Cap rate is a market driven number you can get a feel for by reviewing similar types of property on loopnet. After you determine it, you can then divide the net operating income by that number to determine what the property is worth,

  7. Douglas,

    I am getting some push back and disagreement on the tax treatment for these deals from two different CPA’s and even two different tax attorney’s. Do you know a tax attorney or real estate attorney that does ALOT of these transactions since I need to ensure that the IRS does not reclassify an improperly done lease option as a installment sale.

    • Brian,

      I’ve not had any problems with the Service attempting to reclassify a properly structured Commercial Master Lease and Option to Purchase deal. You just need to make sure that the deal does not prematurely transfer any incidence of ownership to the lessee.

      Some suggestions: Make sure that your Commercial Master Lease and your Option to Purchase are SEPARATE documents. None of the rental payments should be applied to the purchase price of the property. The Commercial Master Lease should not reference the Option to Purchase – each should stand on its own.

      The problem you will find with many CPAs and attorneys is that they “don’t know beans” about real estate transactions. Where are you located? I may be able to make some suggestions 🙂

      • Douglas Dowell on

        I concur with Bill on this point,

        With due respect to my former colleges most are strait from undergrad and go strait into practice. Great at theory…very good at research…but missing a piece of the puzzle. Bottom line great business minds and great lawyers (CPA’s) are seldom in the same person.

  8. I have been doing so much study of tax law and accounting that I keep joking to my friends that I am going to go to law school, get an ms in taxation and take the CPA exams and it might be faster than trying to find someone who is good in each of them.

    I am in Boston, MA but will travel or work over the phone for a good lawyer.

    What exactly do you mean by “incidence of ownership”

    Is their any special issues with very long dated options (10,20 or even 99 years).

    Can the price on the option be set now or does it need to float based upon some kind of figure (inflation etc)?

    Is the income earned on the spread between rents and your lease payment investment income or taxed like self employment income(aka with out social security and medicare tax like rental income)?

    If some rehab is required, how do you include a recovery mechanism in the deal so that it does not fall into the category where the IRS claims that “exercising the option is the only way to recover your equity in the deal” and there by triggering it to be an installment sale?

    Thank you.

    • Hey Brian,

      I can certainly relate to the study of tax law and accounting-however I’m a tax geek and was a practicing CPA in my “former life,” so that’s my excuse 🙂

      So here’s the deal: I recommend the use of a good tax pro for preparing your tax returns and assisting with tax strategy. Use a good real estate attorney for drafting and reviewing your contracts. If you need someone for tax prep and strategy both Steven Hamilton and Charles Perkins (members here at BP) get my highest recommendation.

      Incidence of ownership might include having all or some part of the monthly rent applied to the purchase price of the property, having an extremely large down payment, or sometimes even having the tenant responsible for all repairs and maintenance for the property. This is all more indicative of a sales transaction than a lease and option transaction.

      I have not encountered any special issues with long dated options. I know that most people seem to think that there is a magic number and if you exceed that number of years then your transaction becomes a sale rather than a lease. That’s just not the case. Each transaction is reviewed for substance over form. I have seen a lease as short as two years reclassified as a purchase and those as long as 10 years treated as a lease and option with no problems whatsoever. One of the longest I have seen was the the Empire State Building with a 114 year master lease.

      The price of the option generally is set at the time the contract is entered. It does not need to have an inflation factor figured in, although some sellers like this as it gives them the opportunity to get a higher price for the property.

      The income on the spread is not NOT considered investment income. As a master tenant you become landlord to your sub-tenants. Accordingly the income is considered rental income. It is not considered self-employment income but is subject to ordinary tax.

      Personally I do not do master lease options that require rehab. The simplest way to cover this, though, is to have a clause in your contract that requires the seller to reimburse for any rehab expenses in the event the option is not exercised. This would preclude having to exercise the option in order to recover your costs.

      Hope this helps.

  9. I’ve been reaching out to agents that have small (8-20) apartments listed in areas where I purchase SFHs. I haven’t had any bite yet, but I’m still looking. I understand the idea of taking over, filling vacancies, raising rents to market rates etc. But what do you base the lease cost on? I assume it needs to be less than current rents, otherwise I’m in the hole from the start. I assume everything is negotiable, but where is a good place to start negotiating the payments I make to the owner? Thanks – great article

    • Douglas Dowell on

      Thanks Bryan,

      I think the most common practice is to base the payment on the current NOI or very close to it. The owner will have no real incentive to accept less right? The converse is true to me as well. You don’t want to pay much more than current NOI or else your paying someone else for your marketing talent.

      • Tell me if I’m dreaming. . . .
        Incentive to accept less than current NOI would be to get a higher sale price, continue to pay down mortgage with no effort/work, quick & easy turnover of building,

        I could afford to offer a higher sales price knowing in 5 years, I am able to capture the appreciation over that price and that I am raising capital from rents without putting money into the deal up front.

        Or is that a pipe dream? Do MLOs only work on mismanaged, distressed properties with high vacancies and under market rents?

        • Douglas Dowell on

          I am from the school of thought that says the answer to an unasked question is always no. Whats the harm in trying? The thing I really like about Commercial is the owner your negotiating with is probably as creative as you are.

          I personally want a MLO with no less than 70% occ and probably not much more than 80%. At 70% or so hopefully at breakeven and covering the note with lots of room to drive value. Above 80 percent my guess it would be a little less likely to happen.

          Above all else I take an anything is possible approach these days…..

  10. Just what I was looking for, great article! I purchased a franchise over two years ago that has seen the up’s and down’s of the economy and still going strong in it’s 11th year being opened. The plaza where my company is located was once completely full but now we are 1 of 2 companies that occupy one building and the other building is vacant and it’s closer to the road. I have a couple of interested tenants if I purchase the other building and I’m confident that our business brand name and my experience will yield 100% occupancy. My finances are okay but there’s always room for improvement, so I think a MLO would be perfect to make my first commercial investment. Any suggestions?

  11. Douglas Dowell

    Hello Vinny,

    It seems direct mail, patience, and relationships are the key to scoring in this space. Bill Walston who commented above is a great guy to know and has done 50 Plus MLO’s so he would be a great guy to network with.

    Happy hunting.

  12. Pat G.

    Great tread:
    Hope that you still respond, being this was 2013. I have one question on the Option Price would you go 3-5% from their asking price now? With a 5 year term or how would you set that price so the seller feels like he is getting something for waiting? I can see that the Option Price is a big deal, or not to the seller.

    Thanks in advance,
    Pat Gage

    • Douglas Dowell

      Hello Pat,

      It seems to me the real answer is whatever you can negotiate. I would touch base with Bill Walston as he is a monster MLO guy.

      I have not had luck with this strategy in Multi-Family as the market is white hot. It might work in a disfavored class like retail or office but I suggest extreme caution in both.

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