How to Make Money in Real Estate Using Sandwich Lease Options

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You can make money by subleasing your place at a higher rent.
You can make money by subleasing your place at a higher rent. (Image: Jupiterimages/Photos.com/Getty Images)

A sandwich lease exists when one tenant subleases to another at a higher monthly rent. Profit potential is maximized when both parties have a lease with an option to buy contract. The subletter's purchase price is higher than the original tenant's purchase price and the difference is pure profit, assuming everyone exercises the option. If the subletter doesn't buy, the higher monthly rent provides a profitable income stream for the term of the lease.

Identify attractive properties in nice, stable neighborhoods that are likely to appreciate in value over the next few years. Hire an attorney to write a lease option that is legally sufficient and enforceable. The option is only binding on the optionor (the homeowner) and must state the term of the contract, the future sales price and the amount of the nonrefundable option deposit. Locate future possible tenants.

Rent a property with an option to buy. A long-term lease of one to five years has more potential for profit. Make sure if you decide to exercise the option that you can purchase the property anytime during the term of the contract, and that the option deposit is applied to a future down payment. Make it clear to the landlord that you intend to sublease the property.

Find a tenant who also wants to rent with an option to buy. This sublease term can't be longer than your lease term. Ideally, the tenant will be able to obtain a mortgage loan before the option to buy expires, so check her credit report to make sure that is possible. Your tenant's option deposit, monthly rent and future purchase price must all be higher than what you're paying in order to maximize your potential profit.

Collect your profits. If your tenant decides to buy, then you exercise your option with an earlier closing date than the tenant's closing. In this case you've made money on the monthly rent and the purchase price. If the tenant decides not to buy, you've made money on the monthly rent and the nonrefundable option deposit, and you can let your own option expire, renew it and repeat the scenario with another tenant, buy the property or walk away. Any way you do it, you've made a profit.

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