A few months ago, I L/O’ed a Park for a $1,000 Option. Revenue about 16.5K, total lease payment 5700. In two months operation it yields about 8K per month after all expenses.(This will only happen if it stays full obviously).
A serious investor here asked if I would sub lease to him for 2K to me and 5700 to Lessor. Hmmmmm…8K with work, 2K with no work on a 1,000 basis. My lease has an assignability clause.
I declined, but if that 2K were to increase, I might be tempted…a lot!
Ryan posted here a few weeks ago talking about keeping an open mind in this business, but never in my wildest dreams, would I have thought of this scenario. It makes perfect sense. This sub leasee could make 6K per month on a 1K investment and I woul make 2K per monthX 12months= 24K X 7 years = 168K for finding a deal. I would have no money in the deal with a 2K option from sub leasee.
the sub leasee would make 504K after 7 years and it actually almost makes sense…what do you think???
It is hard to refuse free money. Most Wholesalers would be happy with a fee of $5-10k for 1 deal. $168k for 1 deal is awesome. As long as you have other things to work on, take the money & run.
How about sub leasing the park for a year, or more or whatever. Do I remember you saying that you wanted to take a year off?
Or how about subleasing for management, that is, you get some of the loot, & somebody else manages the park for the other “some”, for a specified period.
Or how about selling them 1/2 of the profits for 14 years, for the buy out price at 7 years, and they manage, with a triple net lease. You could even amortize that, with taxes & ins. escrowed. And after 14 years you have a full park, paid for & got paid all along.
Proof once again that if you buy right you have more exits than one can imagine. =)
here’s a curve ball back at ya… What if you take a 10k transfer fee for the lease, $2500 a month with a convenient that if the park falls below a certain percentage of occupancy that it shall revert to you.
That would give you enough up front to make sure that the investor isn’t going to back out at the drop of a dime the first time a tenant whines about their neighbor. The convenient for vacancy would keep them from running people off left and right dropping your value in the property. Well secured by performance of the lessee I’d be very tempted to take $2500 a month with no work while retaining the ownership of the property…
As for returns your’s is off the chart’s no matter how you calculate it. Your sublease would gain $5500 month for 72 months or a 660% return along with the $66,000 /yr in income increase which can be reinvested to further grow their portfolio. I consider this to be a win -win -win setup, even if you keep it yourself I don’t think anyone can go wrong.
Then you could also do a partner split on the rental income eliminating all risk to the sublease and increasing what you are likely to receive every month… The options are endless my friend! =)
Best wishes,
Ryan Needler (who’ll still give ya twice what ya paid for your option =p )
I really don’t know why i was so shocked by the offer. Isn’t the first thing we tell newbies to ask folks is “Is this Park for sale/lease?”
You brought up a very salient (I know, lose the Scrabble) point in an earlier well written post of the “tool” of keeping an open mind. This aptly depicts the dichotomy of ME not practising what I openly preach!
What this has taught me is no matter how much time I spend researching a particular deal there WILL be things and exit strats that I have overlooked. My fear is I might overlook something that in some other (unknown?) way could make me some extra money. For such a simple business it can get very complicated with all the curves.
One other thing this reinforces for me is how critical it is to continue to educate myself in as many aspects of this business as I can. Bootcamps, seminars, books, financial calculator, networking!
I have financed many parks over the past few years. One thing I have never got involved in was a lease option. I have heard many great success stories on the subject, my own father included. It seems that with a lease option, you will have the benefit of cash-flow - in many cases better than you might expect through purchasing with finance - and appreciation, but can also avoid a certain amount of liability. Come the end of your lease you can walk away at that point if the property value has actually gone down for any reason. I’m not sure of the legalities, but it would seem you would be protected from liability should someone get hurt or sick from the property unless you were directly responsible somehow.
I have a few questions that hopefully someone could shed some light on. My own ignorance on the subject intrigues me! I have been wanting to purchase a commercial property over the past few years, but here in Southern Oregon there are not too many properties that make sense from a cash in vs cash flow perspective. i.e. For a mobile home park or apartment in Medford, OR you might expect to put down 30% or 40% just to make the bare minimum debt service coverage cushion assuming a 6.50% rate on a 30 year amortization.
Can anyone steer me towards some good resources for learning more about the specifics and details that might need to be addressed in a lease contract?
I couldn’t ever think of a reason why an owner might want to lease instead of sell. Is there some benefit to the seller?
Is there a typical up-front cost to getting into a lease option? I have only had one lease offered to me, and the guy wanted $40,000 down and monthly payments for a 30 year lease with no option to buy - a 5 acre parcel with a single mobile home on it and not zoned for commercial. I turned him down pretty quick.
Anything else to keep in mind as far as lease options go?
Great post! Can you elaborate below maybe with actual deals; sound very interesting to make it easier from another party or seller to partner with you; how do one structure the deal, you at 51% the other at 49%?
“…Then you could also do a partner split on the rental income eliminating all risk to the sublease and increasing what you are likely to receive every month… The options are endless my friend! =)…”
I’ve taken a lesson from Steve Case on this one, IF you listen to what he says he is a giver… He expects ALL of his partners to make good money and to share the rewards. There is no back stabbing, he/she gets more than me, and everyone knows their part. It’s a big win for everyone or he’s not going to do it… I see this same trait in everyone I want to someday be like!
My partners are just that, they are PARTNERS, they share the risk and the rewards with me! Normally I set it up so that the money partner puts up 100% of the cash and I put up or arrange all the day to day and we split the money returned 50/50.
Here are a couple examples for you…
A little Lonnie deal I did today, purchase price is $3360 needs about $150 in repairs, and we’ll incurre $110-440 in lot rent due to the approaching holiday season. The unit will sell easy for $11,900 on a note with $750+ down and the payments will be right around $225-250 per month for about 80 months. I do all the work, sell the unit, handle any repo’s etc. My partner writes a check and worst case will be in the deal for about $3500 after his share of the down payment which puts his yield at 34%+ and his total profit at about $5500 with the swipe of his pen if everything goes perfect and we never get the unit back. I’ll make roughly $9300 with his cash for doing all the work and handling every problem for the next 6 years. I consider this a win win and I think all of my partners would agree…
On bigger deals the numbers get staggering very fast! One of my partners and I bought 2 small MHP’s 2 months ago, I contracted the park negotiated the deal and did all the running. He put up 15k for the down payment and the owner carried $275k at 8% with no calls and full assignability. He has provided all the money to fix the properties and I’ve directed the operations and put a little elbow grease in to the pot. The property was just slightly over break even at purchase (about $50 in reality), by fixing a few management problems, replacing non-paying tenants, eliminating the drug dealer & the problem tenants, and making all safety repairs we’ve brought the net cahflow to about $2850 in 2 months. when the project is finished it will be up to a minimum of $4k /month net up to a potential of just under 6k if we get carried away. Once the outflow for repairs is under control we will split the cash flow 50/50 and the proceeds from the future sale the same, if we sell at the 24 month mark we’ll have realized roughly $100k in cash flow and a total profit of about $217k. That would put my partners yield at some where just shy of 200% and we’ll each walk with about 170k. If we decide to sell sooner the numbers might not be as high but we’ll still more than do ok!
The way I see it, is that a person with money and no time or knowledge is no better off than a solid investor with no cash. You put the two together and you create a deadly team that can quickly dominate a market and take full advantage of niches and opportunities as they are presented. My personal set point is that if I can’t give my partners a 25-30%+ return than I need an investor and must take 100% of the risk myself, if I’m not willing or able to do either than the deal is to skinny to be doing.
I’ve got the time, & some of the money, but I’ve also got a case of “burnout/complacency”. I would really like to expand what I’ve got, & put some of my cash to better use, but I’m not interested in taking on any more day to day management. I guess I need to work on my networking skills, because I’m having a hard time finding a solid investor with no cash. I’m hoping to make some new contacts at the Troy MOM.
Maybe I should have been a little more outgoing at BootCamp, but was doing good to absorb some of the info that was being passed around. We spoke several times, I’m the tall, skinny blonde guy that sat in front of you on the bus.
Ryan - In terms of paperwork and whatnot, how to do you structure your deals with partners? Is the partner’s investment a secured loan? Do you create a separate LLC? How does it work?