In our last article we talked about one way of creating cash flow without using cash. I told you how Bob and Greta used “Sweat Equity” to acquire income properties and generate cash flow. Let’s look at another “Formula” that could have worked just about as well and probably even better for the seller.
To refresh your memory, here was the situation: Bob and Greta found this duplex consisting of 2 apartment units. Each unit contained two bedrooms, and both units were vacant. The units needed some minor fix up, and more clean-up, to make them ready for rent.
The owner/seller did not want to manage the units anymore. He was sick and tired of tenants and toilets, and he wanted “out” of the property. He was asking $30,000 (Remember this was back in the 1960′s, but the formula still works today – Just add more zero’s). Bob and Greta bought the property for $25,000 plus their down payment; which was the work to get the units ready for rent. The terms were $150 per month including 6% interest, with the first payment being due when the first unit was rented. Bob and Greta quickly rented the cleaned up units for $300 per month (each), and after all expenses, generated a nice $300 per month Cash Flow. They later repeated this formula to create multiple Cash Flows.
Now, let’s discuss another way this could have been done to realize pretty much the same profit for the parties, and maybe even better for the seller. Let’s say that Bob & Greta offered to lease the property with the right to sub-lease to other parties. Again, there would be no money up front because Bob & Greta still had to do the fix up and clean-up. They would negotiate a 10 year Lease with the owner; with Lease payments of $250 per month. Bear in mind that the owner/seller still has to pay Insurance and Taxes; however, he also still retains all the tax benefits of ownership.
Bob & Greta rented out the units for $300 per month each, realizing a $350 per month Cash Flow. So let’s take it a step further. Let’s say that Bob and Greta want to spend their time finding more properties and not be bothered with managing the units. So here’s something they might consider: Sub-lease the property to another party; probably someone who is already managing other rental property. They could sublease the units to the third party for say $450 per month, which leaves immediate profit in the deal for the third party who can raise the rents as time goes by.
This technique is known as a “Sandwich Lease”. This benefits both parties in that Bob and Gretta can go and do what they would like to do, rather than manage property, and it also gives the experienced property manager, who is already in the business, immediate Cash Flow without having to find a tenant. To make this a sweeter deal for Bob and Greta when they negotiate the deal with the owner/seller, they should obtain an “Option” to buy the property for $25,000 at any time during the Lease period.
Now, let’s see what Bob and Greta realized from this deal:
1. They acquire and control a property without putting up any cash.
2. They created a “Sandwich Lease” which gives them $200 per month Cash Flow without any management on their part.
Note: This “Sandwich Lease” position could be sold to another party or used as part purchase price to buy another property – $200 per month for 10 years = $24,000.
3. They have an “Option” to buy the property for $25,000 which they can exercise at any time or they can sell or trade the “Option” to another party.
Not bad – with NO CASH and a little INGENUITY!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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