WLCCI

Sublease Income Property For A Profit

Sometimes you will find a property which would not be suitable for your personal residence and yet would make a good rental property. What if you find a single-family home that is selling for more than its fair market value? The property is being offered at $65,000 and its value is about $60,000. If rented, its fair market rent would be approximately $575 per month.

You could offer the seller a three year lease option with payments of $550 to $600 per month. You could then sublease the property to a tenant for $575 per month and have, depending upon the terms of your lease option, a cash flow of approximately plus or minus $25 per month. If you have to supplement the rental income with cash out of your pocket, it will probably only be temporary.

Over the next three years, you could reasonably expect rents to go up at least 5% per year. By the end of the first year, you will probably have a positive cash flow.

The benefits to the seller in this kind of situation are as follows. Not only would the seller receive the asking price for the property, but all of the tax benefits of owning real estate would be retained because the property is being leased and is now considered investment property. Untaxed monthly income would also be received.

The benefits for the buyer are obvious. While you may have only a very small positive cash flow, you are receiving a $200 per month credit toward the purchase price. You are, in effect, banking money each month, and the tenant is paying for it.

This technique incidentally can work with any size property. You could even lease option an eight unit apartment building. While you may not have a strong positive cash flow during the period of the lease option, you could be fixing up the property and raising rents.

You might even find an owner who is currently paying a 10% management fee to an outside management company who would be willing to lease option the property to you for 10% to 15% less than the current rental income level. That way you would have a positive cash flow while you are lease optioning and then subleasing the property. This technique of using lease options and then subleasing is referred to as a sandwich lease option.