What is 'Sandwich Lease'
A sandwich lease is a lease agreement in which a party leases a property from an agent who is, in turn, leasing the property from the owner.
BREAKING DOWN 'Sandwich Lease'
A sandwich lease refers to a situation in which one party leases a property from an owner, and subsequently leases that property to another party. A sandwich lease is seen by some as an advantageous strategy for low-capital investors to gain a foothold in real estate markets, as it is possible for an investor to initiate a sandwich lease with no money down, and without the involvement of a bank. This strategy, however, can be a risky and labor-intensive undertaking.
Investors looking for sandwich lease opportunities need to be savvy communicators and negotiators, first to identify and establish a lease agreement with a property owner, and second to identify and establish an agreement with a lessee of their own. In addition to the investment of time required to make sandwich lease profitable, it is not uncommon for the middle party to also put sweat equity into the property through maintenance and property management labor.
A Sandwich Lease Scenario
Alice, a homeowner, is having trouble selling a house she no longer lives in because of a slowdown in the real estate market in the neighborhood. Alice is under no financial pressure to sell this house, and is not interested in renting it out and acting as a landlord.
Brynne proposes a sandwich lease deal to Alice, offering to lease the home for five years with the option to purchase the home at any point during that lease at a defined price of $200,000.
Alice agrees to the deal, which requires Brynne to pay $1000 per month in rent. A $200 portion of this monthly rent will be applied to the final purchase price if Brynne decides to purchase. Additionally, Brynne agrees to pay a one-time option fee of $2500 to initiate the agreement, which will also be applied to Brynne’s purchase price later on.
Brynne, in turn, establishes a lease agreement with Carl, who moves into the home. Carl is also interested in leasing to own this house, and so his five-year lease agreement bears some similar characteristics to Brynne’s. Carl, however, leases the house for $1500 per month with the option to buy the house for $250,000 any time before the five-year period ends. Similar to Brynne’s agreement, $200 of Carl’s monthly rent is applicable to the later purchase price. He also pays an option fee of $3000, which can be applied to his purchase price if and when he chooses to purchase.
When Carl finally purchases the home after five years, Alice makes her full price on the property, and Brynne profits on the difference.