Posts tagged "apartment turnaround"

The Master Lease Option: Minimum Risk, Maximum Reward


Master Lease OptionOne of the most awesome strategies to use as an Apartment Entrepreneur is a Master Lease Option. Lease options are common place in the quick-turn “pretty house” arena, but lease options when used on single family homes don’t reflect anywhere near the profit potential that is really possible using this powerful piece of creative financing. When you move from single family to multi-family in your use of the lease option, the risk/reward tilts dramatically in your favor and your profit potential shoots straight up, in hockey stick style increase.

When applied to a multi-family property, the lease option becomes a “master” lease option. The distinction is you are leasing from an individual party, the Seller, but have the right to sub-lease to multiple parties, the Tenants. Hence you have the “master” right to sub-lease … Master Lease Option.

All of the benefits associated with a lease option you have heard about, apply to the Master Lease Option as well:

  • less risk; you are not taking title, the deed, mortgage, and tax bill stay in the Seller’s name.
  • less money required down; option consideration is at a maximum 5%, but often closer to zero.
  • no qualifying; no 3rd party has to approve you, this financing is between you and the Seller.
  • fast close; how long it takes to get a title search done and the agreement drawn is how long it takes to close, anywhere from a few days to a month at the outside.
  • easy exit; if after running the property for 6 months or so you realize the deal is not as good as you thought it was and you want out, it is simply a matter of canceling the agreement with the Seller. In case of default, the Seller simply cancels the agreement for you and just keeps the option consideration as his/her sole remedy.
  • control; you get all the benefits of managing and profiting from the property as though you own it, by merely controlling it.
  • huge profit potential; you get an option to buy the property at a price based on what the property is worth today, that spans years into the future, allowing you to increase the value of the property over time and then sell it based on its new increased future value.

When the lease option becomes a Master Lease Option though, there appears another dimension that adds two or three more zeros to a deal’s profitability.

That is, unlike single family homes, apartment buildings are valued based on the income they produce. The value of a property with 30% vacancy and below market rents is dramatically lower than if it was 90% occupied with tenants paying market rent. For mid-sized apartment properties in the mid-west this difference can be in the hundreds of thousands of dollars. For larger apartment complexes in high dollar markets, the difference can be millions.

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Posted by Ben - March 8, 2013 at 12:24 pm

Categories: Apartment Investing   Tags: , , , , , ,

How To Make A Comfortable Living Buying Apartment Buildings Without Using My Own Money

There are two components to this question.

1) How do you find an apartment building that will throw off enough positive cashflow to provide you with a comfortable living?
2) Once you’ve found that property, how do you buy it using none of your own money?

Point 1) begs the question; what exactly is a comfortable living. The definition of a comfortable living is going to differ for just about everyone, but to get a general idea let’s look at some personal income statistics from Wikipedia.

If you look at these statistics you can see the income of people varies widely depending on, a) whether they are male or female, and b) how much education they have. Based on people who are over 25, high school graduates earn $26,000 a year, some college $31,000 a year, And the way the trend goes, the more education people have the higher their income is.

Source: Wikipedia

If you are a high school graduate your income is likely to be $26,506, or thereabouts. If you have a Bachelors degree your income is probably $49,300 or more. I don’t know what your situation is or where you fall in this range, but let’s say it’s somewhere between $26,000 and $49,000. So if your income is between $26,000 and $49,000 a year that means it’s on average about $35,000 per year.

So if you are going to create a “comfortable living” buying an apartment building, the first thing the property must accomplish for you is replace your current income. So let’s define “comfortable living” as replacing your current income, and then adding another 20% on top of that to provide the comfort factor. To keep with round numbers and something that is easily divisible by twelve, let’s say that comfortable living number is $48,000 a year, which is $4,000 per month.

Now, how do you find an apartment building, or buildings, that will produce $4,000 per month or more? Well, there are many, many ways to do that, as in all of real estate there are many different ways to get to that objective. But let’s stay within the realm of apartment buildings, and the easiest way,  which is to buy turnarounds.

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Posted by Ben - November 22, 2012 at 10:51 am

Categories: Q&A   Tags: , , , ,