How to Use an MLO (Master Lease Option) to Invest Creatively

How to Use an MLO (Master Lease Option) to Invest Creatively

3 min read
Brandon Turner

Brandon Turner is an active real estate investor, entrepreneur, writer, and podcaster. He is a nationally recognized leader in the real estate education space and has taught millions of people how to find, finance, and manage real estate investments.

Experience
Brandon began buying rental properties and flipping houses at the age of 21. He started with a single family home, where he rented out the bedrooms, but quickly moved on to a duplex, where he lived in half and rented out the other half.

From there, Brandon began buying both single family and multifamily rental properties, as well as fix and flipping single family homes in Washington state. Later, he expanded to larger apartments and mobile home parks across the country.

Today, Brandon is the managing member at Open Door Capital, where he raises money to purchase and turn around large mobile home parks and apartment complexes. He owns nearly 300 units across four states.

In addition to real estate investing experience, Brandon is also a best-selling author, having published four full-length non-fiction books, two e-books, and two personal development daily success journals. He has sold more than 400,000 books worldwide. His top-selling title, The Book on Rental Property Investing, is consistently ranked in the top 50 of all business books in the world on Amazon.com, having also garnered nearly 700 five-star reviews on the Amazon platform.

In addition to books, Brandon also publishes regular audio and video content that reaches millions each year. His videos on YouTube have been watched cumulatively more than 10,000,000 times, and the podcast he hosts weekly, the BiggerPockets Podcast, is the top-ranked real estate podcast in the world, with more than 75,000,000 downloads over 350 unique episodes. The show also has over 10,000 five-star reviews in iTunes and is consistently in the top 10 of all business podcasts on iTunes.

A life-long adventurer, Brandon (along with Heather and daughter Rosie and son Wilder) spends his time surfing, snorkeling, hiking, and swimming in the ocean near his home in Maui, Hawaii.

Press
Brandon’s writing has been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media.

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Instagram @beardybrandon
Open Door Capital

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An MLO takes the lease option concept to a whole new level, and its use can have a tremendous impact on your real estate investing, especially if you are trying to invest creatively.

An MLO works pretty much the same way as a regular lease option, in that there is a lease, a lessor, a lessee, and an option fee. However, with an MLO, the lessee (the tenant/buyer) generally pays all the expenses associated with the property, including taxes, insurance, and any maintenance concerns—and then sublets the property out to tenants who then live in the property.

Although an MLO can be used with any size property, it is most common with larger investments, such as apartment buildings and commercial real estate. It is very similar to seller financing, which we’ll cover in the next chapter, but no title is actually transferred. Instead, the property is simply leased for a long period of time for a set monthly rental amount. The owner (the lessor) receives monthly payments but is no longer involved in managing the property. Instead, the investor who has the option (the lessee) takes care of the property, collecting rent, paying the bills, and acting as the proxy owner, keeping the cash flow difference.

An MLO can be a great way to buy a large multifamily or commercial property using very little money out of pocket. Because you are not actually purchasing the property, there is no change in title, but you are entitled to all the cash flow (positive or negative), as well as any appreciation benefits, because you lock in a future purchase price as part of the option contract.

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Related: 3 Strategies for Using a Lease Option to Invest in Real Estate Creatively

Example: How a Master Lease Option Works

Let me give you an example of how an MLO might work in the real world.

Marsha was a 20-something investor with a few house flips and rentals under her belt who was looking to invest in larger properties. After reading several books on the subject, she decided investing in apartment complexes was the path she would take in her investment career. She mentioned her ambitions to a local investor, Phil, at church the following Sunday. “Actually,” Phil said, “I’m looking to travel more and sell off my own apartment complex.” This is networking at its finest!

After several conversations, Marsha and Phil agreed to work together to accomplish both of their goals. Being a 20-something investor, Marsha had very little money, so giving Phil enough to even pay the closing costs was beyond her capabilities. Instead, they decided to start with an MLO. Phil agreed to accept a monthly rent of $2,500 and to give Marsha three years in which to purchase the property. Paperwork was signed, and Marsha took over the property with no cash out of pocket and with cash flow from day one.

Marsha’s job was then to manage the property, accept rent, manage any handymen, and pay all the bills—100% of them. Meanwhile, Phil and his wife bought a camper and began enjoying their retirement, driving around the United States and loving the steady MLO payment deposited in their account each and every month.

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Related: 3 Risks and Drawbacks of the Real Estate Lease Option

Networking to Grow Your Creative Investing

If this story seems too good to be true, I have a secret: This is the story of how I bought my 24-unit apartment building when I was just 25 years old. (I had to change the name and gender, of course, to throw you off!). We later converted the master lease option to a full-blown seller-financed deal. So these kinds of opportunities do exist and can be done for very little money out of pocket. Notice that the deal came to me because I simply learned about the concept and told other people about my passions. I had no idea that “Phil” owned an apartment complex; I just let my passion spill over into my day-to-day life.

As I’ve said before, networking is a lifestyle.

The same can happen for you, and amazing deals can fall into your lap if you take the time to educate yourself and share your dreams with others. You never know what you might find.

[This article is an excerpt from Brandon Turner’s The Book on Investing With No (and Low) Money Down.]

Have you ever used a master lease option? Is this something you’d consider?

Let me know with a comment!

An MLO takes the lease option concept to a new level, and its use can have a tremendous impact on your creative real estate investing.