Notes aren’t the only real estate paper you can broker. A property owner who leases land or a building to a tenant has a stream of rent payments, and that stream can be sold for cash like a note. Some funders that buy seller-held real estate receivables, lotteries and structured settlements also buy real estate leases.
What a real estate lease income stream is
A real estate lease is one where a property owner (the lessor) leases land, a building or both to another party (the lessee). In a lease, the lessor’s interest is generally assignable. That means the lessor can sell the right to receive the rent, just as a note holder can sell the right to receive payments.
Lease purchases can work for both residential and commercial leases.
What a funder needs to evaluate a lease
With a few simple documents, a funder can tell whether a lease fits its purchase guidelines. Expect to provide:
- A complete copy of the lease, with copies of any amendments or modifications.
- Details of any deed of trust or mortgage on the property, with the monthly payment due on each.
- The lessee’s name, address and Social Security number (for a credit check).
- A payment history covering the last 12 to 36 months.
Sample lease purchase guidelines
Here are the guidelines one funder published for its lease program at the time of writing. Every funder sets its own terms, so use these to understand the shape of a deal, not to price one.
| Guideline | One funder’s terms |
|---|---|
| Minimum investment | $10,000 |
| Maximum investment | $250,000 |
| Maximum term of purchase | 10 years |
| Maximum purchase | Up to 1 year of the remaining guaranteed lease term |
| Mortgage obligations | All purchases net of all mortgage obligations |
| Yield pricing | 12% to 24% |
| Yield discount for 3 years of perfect pay history | Up to 1.0% off |
| Yield discount for a personal guarantee by the lessor | Up to 1.0% off |
| Property types | All |
| Security | Real estate collateral or credit-based |
| Maintenance clauses | Reviewed case by case |
Two points stand out. The funder buys only rent that is left after the mortgage payments are covered, and a clean payment history or a personal guarantee can lower the yield it requires, which raises the price the lessor gets.
