Commercial Real Estate

How to Use a Master Lease to Acquire Commercial Real Estate With No Money Down

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
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The vast majority of commercial real estate deals are “conventional” with regard to financing, meaning they are financed with a commercial lender requiring 20% – 30% down. But it’s important to have other, perhaps more creative, financing techniques at your disposal because they can get you into a deal when traditional methods fail.

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One of those techniques is the master lease.

While the details of a master lease can vary widely, here it is in a nutshell using a case study scenario.

Let’s say you’re looking at an apartment building and have determined it’s worth $1.5M based on actual financials. The building has problems: there is quite a bit deferred maintenance, and as a result, the owner has about 30% of the units empty and he hasn’t raised rents in the last 5 years. The building needs some TLC and better management. You think that if you sink about $120,000 into the building and replace the property manager, the building would be worth $2.5M.

Related: The Book on Investing in Real Estate with No (and Low) Money Down

Unfortunately, the seller is dead-set on $1.7M, and nothing less. And he’s certainly not going to give you a $120,000 repair credit.

Sharpening Your Pencil

You could walk from the deal, or you could propose some creative financing to see if you can get something to work before you move on.

You propose to the seller that you lease the building from him with an option to buy. Every month you will make a lease payment so that the seller can pay his fixed expenses (like mortgage, real estate taxes, and insurance) and put a little extra in his pocket.

In return, he gets his asking price of $1.7M, and he doesn’t have to worry about having to manage his sinking ship, uhh, I mean apartment building. He still gets all of the tax benefits. Perhaps you pay him something for the option to buy, even though if he doesn’t ask for it, don’t volunteer the idea.

You, in turn, will invest capital in HIS building to make it better, and if you don’t exercise your option to buy, he still owns the building and it’s likely to be in better shape than it was before and he can sell it again.

Even though you don’t OWN the building, you CONTROL it. You are now working for the upside in both cash flow and appreciation. If you make the necessary renovations, reduce the vacancies and raise rents, you’re not only making a monthly income, but you’re also raising the value of the building.

Cashing In With No or Little Cash Down

If you play your cards right, then in 1-2 years the building will be worth $2.5M. At that point, you could actually market the property, get a buyer at $2.5M and do a double close, pocketing a gross profit of $800K.

Or you could hold it yourself. Assuming the building appraised for $2.5M with 20% down, the loan balance would be $2M. That would be enough to cash out the seller for $1.7M and put $300K into your pocket and you now own the building!

Related: How I Bought a 12-Unit Apartment Building with No Money Down (And How it Nearly Bankrupted Me…)

If you like the lease option idea, you can read more about it in Brandon’s ebook How We Bought a 24-Unit Apartment Building for (Almost) No Money Down because that’s how he bought that building with some additional twists and turns.

Conclusion

The nice thing about a master lease is that it allows you to get into a deal with no or little cash (except the capital you might need to renovate), and it allows you to benefit from the upside you create through better management.

While most deals get done with more “conventional” financing, it’s great to have creative techniques like the lease option in your investing toolbox so you can get deals done when a more traditional approach won’t work.

Have you ever used a creative real estate technique successfully?

Let us know your experiences in the comments section below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.

    Al Williamson Rental Property Investor from Sacramento, CA
    Replied over 4 years ago
    Nice Michael Thanks for a clear lesson.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 4 years ago
    Thanks Al
    Ned Young Rental Property Investor from Rockville, MD
    Replied about 3 years ago
    Does anyone have a sample master lease agreement?
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied over 4 years ago
    Great article! Master leases are one of the most creative ways to acquire or control real estate. I first learned about them from Sue Nelson’s book Buying From Banks, and she made a fortune of them (and seller financing). We tried to do it once with 17 duplexes and man I thought they were going to say yes, but then they decided not to.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 4 years ago
    Unfortunately master leases are pretty creative, and oftentimes, a confused mind says NO, which makes these a challenged. But if you have a motivated seller who is set on the price and can be educated, it might work.
    Kamar Williams from Pittsburgh, Pennsylvania
    Replied over 4 years ago
    Good stuff, I’m assuming you would use the equity as your down payment once it appraises.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 4 years ago
    Yes, that’s correct. Thanks!
    Fred Grant Investor from Woonsocket, Rhode Island
    Replied over 4 years ago
    Michael, thank you for this. Definitely something I will be thinking about moving forward.
    David Faulkner Investor from Orange County, California
    Replied over 4 years ago
    Quick Tip: To further protect your investment, make sure the fixed expenses (like mortgage, real estate taxes, and insurance) get paid directly from an escrow/impound account funded by the property’s cash flow. Otherwise, if you just trust that the owner will make these payments out of the lease payments he could pocket the money instead of paying expenses and put your ideal exit strategies of exercising the option in peril.
    Rane Shaub Property Manager from Tacoma, Washington
    Replied over 4 years ago
    Great article Michael. Have you used this strategy with deals brought to you by a broker? Does it create any bad blood with the broker if he was looking for a sale but you end up negotiating a Master Lease with seller? Or do you work him in to get a commission on closing the master lease?
    Michael Worley Investor from Carrollton, Texas
    Replied over 4 years ago
    If you are buying the property for 1.7MM the bank will lend based on the sales price OR the appraised value, whichever is lower(it’s referred to as Loan to Cost or Loan to Value). You couldn’t use the 2.5MM valuation as the basis for the LTV. Most banks will require you to have AT LEAST 12 months of ownership (with many wanting 36 months) to use the appraised value instead of the cost (price plus rehab ). Even in the case that you tried to bump the cost by including rehab costs you always have to have the understanding that the bank’s financing is LIFO so the 20% equity comes out of your pocket first. In short. This won’t work with any type of traditional financing if you are disclosing the deal correctly (i.e. not defrauding the lender).
    Chris Sullens from Oklahoma City, Oklahoma
    Replied about 2 years ago
    Thanks for this comment. I was thinking exactly the same thing! Am I missing something?
    Bac Nguyen Notes Investor from San Diego, California
    Replied about 2 years ago
    @ Janelle Rizal – “No money down” is a catch-phrase and is somewhat relative term which uses loosely. Yes, you can bring in an investor for a piece of the pile to fund your $120K maintenance, etc. In which you don’t put any money down, period. This is the same techniques/principles that I used in buying SFR. The seller gets the ASKING price but I get the terms. Some investors are focus on negotiating the asking price and often overlook the terms.
    Derek Smith Investor from Cincinnati, Ohio
    Replied about 4 years ago
    I retread this but still don’t understand. Where do you get the$120k for repairs/ deferred maintenance to make it no money down?
    Janelle Rizal Web Developer from San Diego, California
    Replied almost 4 years ago
    I’ve read from Susan Lassiter Lyons that this can be truly cash free. So where do you get $120k to renovate?
    winwinjames
    Replied over 3 years ago
    You will use your monthly cash flow to make the repairs or renovate. Once the monthly lease amount is paid to the seller any other income outside of that amount is yours to keep. So you go into the master lease up agreement reduce vacancies, close each month with less than 1% of the GPR and use that income to put back into the property for rehab and reno.
    Chase Keller Real Estate Agent from Des Moines, IA
    Replied over 3 years ago
    I have a deal very similar to this in the works. I have investors that are very interested in getting into a deal and funding the renovation, but how might they see the idea of not owning the property for a couple years? How are they protected? When I buy a property, that’s easy. But with a lease option, are they completely at risk of whether I can exercise the option in the end? In this deal, I can’t rely on the cashflow to fund the renovation, it’s bleeding cash since it’s 40% vacant, has a horrible reputation and rents are pretty low. I won’t be able to raise rents or fill it up until it’s in better shape. Thanks for the help!!
    Papa A. Diop from Atlanta, Georgia
    Replied almost 3 years ago
    hell oguys ..whats the be
    Papa A. Diop from Atlanta, Georgia
    Replied almost 3 years ago
    hello guys .whats the best master lease term ?
    Willie Smith Real Estate Broker from Greenville, NC
    Replied almost 3 years ago
    Im learning about master leases now. But I believe they are for 4 years.
    Logan Holmes Rental Property Investor from Houston, TX
    Replied over 2 years ago
    “Or you could hold it yourself. Assuming the building appraised for $2.5M with 20% down, the loan balance would be $2M. That would be enough to cash out the seller for $1.7M and put $300K into your pocket and you now own the building!” This is so vague. Could someone clear it up for me? How would you cash out like that? Are you assuming the current loan or getting a new loan? The 300k seems like it would just be part of the loan if you held it.
    Mark Pewitt from Nunnelly, Tennessee
    Replied over 2 years ago
    You would be getting a new loan,cash out refi
    Chris Sullens from Oklahoma City, Oklahoma
    Replied about 2 years ago
    It’s not a refi if it’s the first time you are actually financing it though. Right? With a traditional/conventional mortgage, buyer has to bring ~20% of the purchase price to the table, regardless of the valuation of the property. Are commercial loans different in this regard?
    Paul Dzielinski from Redding, Connecticut
    Replied about 2 years ago
    Everything I read about master leases uses examples of properties needing improvement. Can this strategy be used for a no money down on a stable property?
    Chris Sullens from Oklahoma City, Oklahoma
    Replied about 2 years ago
    With a traditional/conventional mortgage, buyer has to bring ~20% of the purchase price to the table, regardless of the valuation of the property. Are commercial loans different in this regard?
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 2 years ago
    Hi Chris – yes, that is true with commercial loans. But remember that with a master lease, there is no loan (at least initially), only when you exercise your option to purchase. Hope that helps! Michael
    Bac Nguyen Notes Investor from San Diego, California
    Replied about 2 years ago
    I believed Mater Lease has two-part – a Lease Agreement and an Option Purchase Agreement. Might combine into one Agreement. I have used this for SFR with Seller Finance. In short, the seller is a bank. So, no conventional bank qualify until you cash out.
    Jim T.
    Replied over 1 year ago
    One question I have about this as I’m considering a deal for an apartment building. So, the leases for the apartment building are with the current owner. How can I collect the rents from the original tenants if all the existing leases are with the owner? Does the owner need to do an assignment of those leases to my company to insure that my company gets the rents so I can make the lease payments to him? Thanks!!!
    Jim T.
    Replied over 1 year ago
    One question I have about this as I’m considering a deal for an apartment building. So, the leases for the apartment building are with the current owner. How can I collect the rents from the original tenants if all the existing leases are with the owner? Does the owner need to do an assignment of those leases to my company to insure that my company gets the rents so I can make the lease payments to him? Thanks!!! Reply Report comment