Weekend Wisdom: The Master Lease

In this short clip Danny Plueddemann explains to us what a master lease is, how it works and why is may be a great option for remote real estate investors. ---   Tom: Hey listeners, Happy Saturday, we're trying a new thing where we're doing little micro episodes. And today we're going to be talking a little bit about the master lease as a little something over the weekend. We're here with Danny Plueddemann. And Danny, tell us about the master lease.   Danny: Yeah, yes. And most people think there's two options you are you going to self manage or hire a property manager, like, those are the only two options out there. And this is a third option, and it's better is better for me as a property manager, and usually is better for them. So yeah, I'm your tenant. So instead of hiring me to be your property manager, you rent the place to me directly. And I'll hit you up for discount on the rent for a long term lease, and I'll try to sublease it and it's for something higher, and I'll try to make money on the spread.   If I'm smart, if I'm doing do a great job, if I'm an awesome property manager, I'll make some money, but I'm responsible for that payment, whether the property is occupied or not. So I'm taking on all the vacancy costs, and I'm taking on a low maintenance cost. So I'll fix whatever's wrong, I'll pay you whether it's vacant or not. So there you go, steady income, and then I got skin in the game, you know what I mean? If I really care about, you know, property, managed to say, I'm gonna care about your property, just like mine, maybe, you know, but everybody understands that you're the one making the mortgage payment, the place goes vacant, you're the one who's replacing the water heater, if that breaks, so that's your problem. So this is the way you know, for, you know, really savvy investor that, you know, I know, my NOI is gonna be this much, can you match it? Beautiful, I'll do it. And then it's for other people. I mean, the last one I did was was a 23 year lease, she just wanted me to match her mortgage payment and pay your house off. That's it. So I'm gonna give her house back free and clear and 23 years, and she's thrilled. And then she's going to have an asset, you know, as free and clear before she had a liability. And she knew she had a liability because it was vacant, and she was cutting, cut the grass, pay the bills and pay the taxes, pay the insurance, and she was losing her mind. So we cut we call it the perfect tenant program. I'm your I'm your tenant, I'll rent it from you. That's it. And then. So anyway, hopefully that explains why it's better for the investor, and then why it's better for the property manager. Frankly, if we can get the landlords out of the way we can do a better job. I know, I know, there's not supposed to say that there's a lot of property managers out there clutching their hearts, they don't talk bad about landlord, but you know.   The asset is the tenant, you know, the house, a vacant house is a liability. So if we can focus on the tenant, and do a good job for the tenant, this is a strange business because we you know, the tenant is one that pays us, but the landlord's one that hires us. So we're always caught in between here's always posted, you know, we have to we have to deal with the landlord wants to know whether they're telling us to do the right thing or not. They're the one who hired us. So we got to do it that way. But then the person that paying us is the tenant, so we know how to make money. So anyway, that's kind of a long answer.   Tom: Yeah, it's an interesting program, you know, talking about different types of leases out there, and you miss out on a little bit of downside of if there's some major rent depreciation, but it's a little bit of a hedge of just, you know, vacancy where you're collecting that rent month in and month out,   Danny: Ideally, rental prices will go up. And I would benefit from that. On the other hand, if rental prices go down, like that in 2009, then I would take it on the chin, so we could but for the long term leases, I'm happy to build in this call an escalating lease where every five years it goes up 100 bucks. Hopefully, that'll cover your increases in taxes and insurance. Yeah, hopefully, there'll be some rental appreciation. And yeah, I can pay more, the longer the lease. And I think that's how much can you pay? Well, one way to do it is keeping good records. What did you net? What you net the last three years?   And if you had a turn, if you had an eviction, if you had anything that you'd probably net and you know, 60 70% of the gross? So absolutely, I can just match that. Another way to explain is what would you factor in for maintenance, vacancy and management, and, you know, just I'll just throw out the 10% for management 10% for maintenance, and 10% for vacancy. Maybe I'm high there's a lot of different ways to break it down between, you know, turn cough capex costs, BlackRock hedge fund, they're factoring 8% for maintenance, I thought that was interesting. And they started out at 6%. And then after they bought 20,000, single family homes, I think, a pretty good data set. Everybody's trying to figure out what their net would be. But that's another way to do it. And you know, maintenance is the biggest frustration between property managers and landlords. You know, there's just a high level of trust, I'm spending your money. Why aren't you getting any money this month? Well, because I replaced your water heater, why aren't you getting my next and this is a huge level of trust, huge source of potential conflict.   Michael: Danny, I love this concept. I think it's really cool. I've got some triple net lease stuff in my portfolio. And I love it. I mean, frankly, it's the easiest stuff ever. Just curious because this is kind of a modified triple net lease like Tom was alluding to. So I could see someone who hears this concept and say, well wait a minute, you as the property manager are renting this property from me and then turning around and subletting it, so couldn't actually be in your best interest to cut corners on expenses. So that way you make a better return. What would you say to someone that asked you that question?     Danny: That's great pushback. Thanks. What I would say is if you're worried about Yeah, deferred maintenance, I'm not gonna keep it up. Let's do this. Michael, instead of doing a five year lease, let's do a 15 year lease,   Michael: Boom, problem solved. I need you in the Midwest, Danny, this is great.                                                                                             Danny: Yeah, and that's how I'm doing like when I do a turn, when I'm doing a master lease, I'm going to spend more money than than the owner would have. I'm going to get the carpet out of there. I'm going to put an lvp for example, right. But I know how to take care of the tenant, I know how to keep the place occupied by keeping the tenant happy. That's the asset. Now I can just focus on the tenant. And I can you know, do the right thing without worry about anybody looking over my shoulder. And that's the key. That's the key to making this because if you're not a good property manager, don't even think about signing a 15 year lease, right? You're gonna lose your shirt.   Michael: You're gonna get cooked yeah.   Danny: And you know, I know it sounds cocky. I think I'm good enough property manager. I know how to do it. That's cool. You got triple net lease. Are those commercial or residential?   Michael: Commercial. Yeah. I've never heard of property managers doing this master leasing. Do you know of many others across the country that do? Are you kind of a unique beacon in this department?   Danny: No, I heard about it from a guy named David Tilney while he was in Colorado Springs. He's since moved the Florida. Yeah, but isn't shortlist isn't shortlist, I mean, I can give you half a dozen names of people that are doing it. Most property managers don't want to be on the hook to pay for maintenance.   Tom: They got to be good, or the, you know, the pm is going to be in the hole. I don't know, I think it's a really interesting lease, especially as a remote investor to kind of take that worry away from the day to day and it's like, you know, I have my lease, it may not be as high of a return if I was, but it's a way less risk and just kind of…   Michael: It’s guaranteed, I'm doing something quite similar in investing in Portugal. And they do they just exactly like you do we call it a guaranteed return. So keep it over 4% 5% return on your money. And we'll take care of everything we'll manage it will lease it out. And we're just going to arbitrage make the difference on it. And if you're happy with the guaranteed return, we're happy with, you know, ours and everybody walks away happy. So I think it's a really cool model. To your point, Danny kind of speaks to the property managers competence. Because they're putting their money where their mouth is. Yep, you can manage this thing. Great. Do it and let's see you pay for it.   Danny: Yeah. And that's why it has to be long term lease, like five years a minimum, because any given year, even though I'm a great property manager, I'm just being cocky, but I might have an eviction and I might replace a water heater that you're sure I'm going negative. But that's okay. I got four more years. I think I can do it. Yeah. But you know, if you're thinking about selling your house and one or two years, that's a good reason to just hire a property manager and not do a master lease because it really does need to be a little bit more long term for the noi to even out.   Tom: Thank you Danny. And as always, happy investing.

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