A sandwich lease is a lease agreement where a real estate investor leases the property from an owner and then leases the same property to someone else.
Sandwich leases are standard in real estate investing, so students must grasp this concept before the exam. Since a sandwich lease is a little complex, you’ll need to learn about this term from trusted real estate professionals. Luckily, we’re happy to share our years of knowledge on sandwich lease options with you.
In this post, we’ll define sandwich lease, give examples of how it works, and discuss the pros and cons of this type of lease. Keep reading to learn more!
What Is a Sandwich Lease?
A sandwich lease is a rent agreement where a property owner rents their property to an investor who, in turn, rents that property to a tenant.
In a sandwich lease, the investor is both the lessor and the lessee. The investor rents the property from the owner and is responsible for paying monthly rent. However, the investor does not live in the property themself. They create a separate rental agreement with a tenant who will live in the space and pay them monthly. The investor acts as the landlord to the tenant so that the property owner has fewer responsibilities.
The investor pays one rent price but charges a higher fee to the tenant. They then collect the difference between the two contracts and earn a profit.
Why Is It Called a Sandwich Lease?
No matter how you slice it, a sandwich lease is a great option for sellers, renters, and investors alike. A sandwich lease earns its name because it requires three crucial ingredients:
- A property owner who is eager to sell
- A tenant who is renting-to-own
- A real estate investor to facilitate the deal
In a sandwich lease, the investor is the meat, while the property owner and tenant are the slices of bread.
What Terms Are Covered in a Sandwich Lease?
According to Nolo, property owners and investors should include the following terms in a sandwich lease agreement:
- Name of every tenant living on the property
- Property description
- Occupancy limitations
- The term length of the lease
- Rent (amount, payment method, and schedule)
- Security deposits and fees
- Maintenance and repair policies
- The landlord’s legal right to access
- Illegal activity restrictions
- Disclosures and restrictions
Example of a Sandwich Lease in Real Estate
Carter is a homeowner having trouble selling his home. He wants to move as soon as possible but isn’t interested in leasing the home and taking on a landlord’s responsibility.
Emily, an investor, proposes a sandwich lease deal to Carter. The agreement states that she will lease the home for three years with the option to buy at any point for $300,000. Emily also agrees to pay a one-time option fee of $3,000 to start the agreement.
Carter signs the agreement, and Emily begins making a monthly rent payment of $1,500. Emily then initiates a deal with Bill, a tenant who wants to buy Carter’s home but cannot afford the down payment.
Bill signs a five-year rental lease with Emily, paying $2,000 monthly for rent with the option to purchase for $350,000 at any time.
In three years, Bill finally purchases the home and pays Emily a $3,000 option fee. Carter receives the full price for the property and Emily profits from the difference. It’s a win for all three parties.
Pros and Cons of a Sandwich Lease
Let’s discuss the pros and cons of sandwich lease options for investors, tenants, and property owners.
For Real Estate Investors
A sandwich lease is an excellent way for investors to enter the real estate market and earn a profit. Investors willing to bide their time can make decent money from a sandwich lease in the long run.
One of the downsides for investors is that finding suitable properties with willing owners can be challenging. Another issue is that sandwich leases require a bit of haggling. Investors may be unable to lower the rent price enough to earn a profit. Even if the investor negotiates the right price, it takes the entire lease term for them to see the fruits of their investment fully.
Investors also have to worry about tenants backing out of the deal. If a tenant exits the agreement, the investor is still responsible for paying rent for the property. In the end, this could result in them losing money.
For Property Owners
Sandwich lease options benefit property owners who are eager to move but have a hard time selling their home. They can rent out their homes without assuming the responsibilities of a landlord. At the end of the lease term, the tenant usually buys the property, so the owner no longer has to worry about finding a buyer.
However, one disadvantage for the owner is that they usually have to offer lower rent to the investor. If they were to lease the home themself, they could earn more money.
A sandwich lease benefits tenants who cannot afford a down payment or have poor credit. This type of lease gives them the opportunity to move into a home and rent it until they can buy.
However, tenants must watch out for rent-to-own scams where the lessor includes deceptive terms. These scams are unfortunately common in sandwich leasing. Tenants may also have to pay more for rent so that the investor can profit. If a tenant decides not to buy the home at the end of the lease, they lose their non-refundable option fee.
Check out this table for a clear breakdown of the advantages and disadvantages of a sandwich lease.
|Pros of a Sandwich Lease||Cons of a Sandwich Lease|
|Real Estate Investors||
How Does a Real Estate Investor Set Up a Sandwich Lease?
A sandwich lease option is an excellent way for investors to get their foot in the door of the real estate market.
Finding a motivated seller is the first step in initiating a sandwich lease. The ideal candidate is having trouble selling their property and does not wish to be a landlord themself. Because the seller is desperate, they will agree to have a third-party investor rent the property for a lower price.
Secondly, the real estate investor must find a tenant who wants to own a home but cannot afford a down payment. This tenant may be interested in a rent-to-own option that allows them to lease a property until they can purchase it.
Finally, the real estate investor must be willing to pay rent to the owner while acting as a landlord to the tenant.
Frequently Asked Questions
Here are some frequently asked questions students and real estate professionals have about sandwich lease options.
Is a Sandwich Lease Legal?
A sandwich lease is legal in most states, but it’s essential to know your state’s laws and limitations. Before initiating a sandwich lease, investors, homeowners, and tenants should ensure they are following all leasing laws in their jurisdiction.
Individuals who opt for sandwich lease options must also be careful of scams. Rent-to-own scams are common for a sandwich lease, as investors and owners may be deceptive or throw in abusive terms.
What Is the Purpose of an Option Fee?
An option fee gives a buyer time to inspect the property and ensure that safety codes are up to standard. No other homebuyers can make an offer in the ten-day window after the buyer pays the option fee.
In a sandwich lease, the investor pays an option fee to the property owner. The tenant then pays an option fee to the real estate investor as a promise that they will purchase the home at the end of the lease. The option fee is non-refundable, so the tenant will not get that money back if they choose not to buy.
Sandwich Lease vs. Sublease: What’s the Difference?
While many people use the terms sandwich lease and sublease interchangeably, there are key differences.
For example, a sublease generally does not involve real estate investors. Tenants may sublet an apartment if they are offered a job in another state but cannot break their lease. If the lease terms allow it, the tenant can find another tenant to sublease the apartment. This will enable them to rent a new place out of state without paying for two leases.
A tenant who is subleasing their apartment must still pay the landlord for rent. If payments are late or missing, it is their responsibility.
What Are Other Examples of Leases in Real Estate?
There are many types of leases in real estate that property owners can offer renters. Other examples include:
• Gross leases
• Modified gross leases
• Full-service gross leases
• Net leases (single, double, and triple)
• Capital leases
• Operating leases
• Percentage leases
What to Know Before the Real Estate Exam
A sandwich lease is an agreement where a property owner rents their space to an investor who then rents the space to a tenant.
Sandwich lease options benefit real estate investors, property owners, and tenants. Because this type of lease is popular in real estate investing, real estate professionals must understand how a sandwich lease works.
But this isn’t the only term students should learn before the exam. You can study other important terms using our online Real Estate Flashcards.