{"id":143648,"date":"2022-07-01T10:04:27","date_gmt":"2022-07-01T16:04:27","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=143648"},"modified":"2023-11-07T13:41:37","modified_gmt":"2023-11-07T20:41:37","slug":"what-is-a-master-lease-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-is-a-master-lease-real-estate","title":{"rendered":"What is a Master Lease and How Can Investors Use It to Scale?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC5978687693&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Property management is a low-margin and labor-intensive business because it\u2019s difficult to maintain a property and keep tenants happy. It\u2019s why many real estate investors outsource property management so they can focus on scaling acquisitions.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In this article, we will discuss a master lease, how it differs from traditional property management, the benefits of a master lease, and more.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What is a Master Lease?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">A master lease is an agreement where a property manager (PM) leases a building from an owner for a negotiated price and then subleases the building to other tenants. This is a strategy used with other real estate assets, such as <a href=\"https:\/\/www.biggerpockets.com\/blog\/airbnb-arbitrage\" target=\"_blank\" rel=\"noreferrer noopener\">Airbnb arbitrage<\/a>, but it can also be used in the commercial sector and elsewhere.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Generally, master leases last for one year, but it varies based on the deal made.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Types of Master Leases<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">There are generally two types of master leases:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Fixed Master Lease &#8211;&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;the lessee agrees to make monthly payments to the owner regardless of profits or tenancy.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Performance<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">Master Lease &#8211;<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;&nbsp;the lessee agrees to pay a percentage of profit only when rents are received.<\/span><\/li>\n<\/ol>\n\n\n\n<p><span data-preserver-spaces=\"true\">A combination of both is called a hybrid master lease and are preferred by many property owners. In a hybrid master lease, there\u2019s a guaranteed monthly payment from the PM, but owners get additional income if the total rents exceed a certain amount. Basically, you can make more profit if the PM can acquire more tenants at higher rent rates.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Master Lease Terms<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Typically, a master lease contract lasts for a year. Depending on the market conditions and your property\u2019s current state, the PM may require free rent or concessions to allocate enough time to improve the property and lease-up.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The costs for maintaining the common area need to be negotiated. Typically, the maintenance costs for amenities that the residents regularly use, such as the pool and gym, are covered in the master lease. The owner should cover everything else in the common area not used daily.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Pros of a Master Lease<\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Save Costs<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">A master lease can help save on payroll, marketing, maintenance, and more costs. Overall, you could expect to save 12-15% of your gross income.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Generally, in master leases, repair and maintenance are covered by the PM, but the costs for the common area vary case by case. Usually, the owner pays for the common area, but the PM might cover costs for maintaining the amenities commonly used by residents, such as the clubhouse, gym, roof terrace, pool, etc.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Minimum Income<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">A master lease guarantees you a minimum rental income, which is great for financing. For example, if you own a property in bad shape and has a lot of vacancies, you could turn around the rent roll quickly by doing a master lease. Instead of taking months to renovate the units and lease out, you can simply refinance with the master lease agreement.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Motivated Property Managers<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">In a master lease, the PM is also more motivated to lease out your units because they could lose money if the property has vacancies. Traditional property management pays a PM based on a percentage (usually 7-12% percent) of the gross income.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In master leases, the agreement terms are different, which means the PM may have more control over their income, for better or worse.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Save Time<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Lastly, master leases require little management from you, which equals more time to focus on other responsibilities.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Cons of Master Lease<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Although expenses can be reduced significantly, the property\u2019s net operating income (NOI) could be lower because the total gross rent is discounted at about 20-25%. For example, if the market rent is about $3,000\/mo, then the master lease would be about $2,400\/mo. NOI loss is more common in a hot rental markets like Los Angeles and New York when the market rent is rising faster than expected.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A 20-25% discount sounds like a lot, but it\u2019s not as significant if you account for general vacancy, costs in payroll, marketing, and maintenance. Even in a hot market, vacancy can still be around 3-5%. During the pandemic, the vacancy rate in San Francisco reached as high as 10%, so a master lease is beneficial to the owners when the market is not doing well.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many PM companies that do master leases offer short-term rentals and charge a large premium. Properties that have daily turnovers will have more wear and tear. Make sure to include a clause in your contract to address the conditions of the units at the end of the master lease to protect your properties.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Bankruptcy is something that you should also consider. Some PM companies were run out of business during the pandemic because they had aggressive master leases. Make sure the PM company you hire is reliable and can pay their commitments.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Notable Companies Using Master Leases<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Master leases are low margin, like traditional property management, and risky business for property management companies, which is why most property management companies have not adopted this business model. Nevertheless, there are some notable startups doing master leases actively to expand their portfolios, such as Tripalink, Bungalow, Sonder, and more.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">These companies usually take over your units in their current condition and <a href=\"https:\/\/www.biggerpockets.com\/glossary\/sublease\" target=\"_blank\" rel=\"noreferrer noopener\">sublease<\/a> them out to other tenants at a higher price by decorating and furnishing the apartment. Some do short-term leases like hotels and Airbnb.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you\u2019re tired of managing your properties, contact these companies and give them a try! You might like it more than you expect!<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Property management is a low-margin and labor-intensive business because it\u2019s difficult to maintain a property and keep tenants happy. It\u2019s why many real estate investors outsource property management so they [&hellip;]<\/p>\n","protected":false},"author":286556,"featured_media":143650,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7119,5524],"tags":[2719],"class_list":["post-143648","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-biggerpockets-daily","category-real-estate-investing-for-beginners","tag-master-lease"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143648","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/286556"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=143648"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143648\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/143650"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=143648"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=143648"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=143648"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}