Buying Real Estate on Terms: From $2,700 Rent to $3,200 Profit

My company buys and sells five to 10 homes monthly around the country. We typically create three paydays per deal and do not use our own cash.

But recently, we took a chance and decided to do something a bit outside of the norm. We bought on terms in an area where terms aren’t really prevalent.

It turned out to be a pretty great deal structure! Here’s how it happened.

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Throwing Away Money Leasing Office Space

We had been renting an office locally for several years and took on more and more space as we grew. The last two years we were paying approximately $2,700 per month.

Being in the real estate business, it pained me to write a check monthly for a lease in a building we don’t own. So, we started looking around for what we needed in terms of space. Most things we found were around $3,500/month minimum, with many closer to $5,000.

It was ridiculous and difficult to even consider as someone in the business.

Finding Rare Deals on a Small Island

“But my market’s different,” you might be thinking. “I could never do that.”

I hear this kind of thing all the time. And I’ll tell you that, although your market may be “different,” there are terms deals available if you know how to find them. You just need to know what pond to fish in.

We happen to live on an island; it consists of three towns. It’s rare for us to do our terms deals at any volume in our area.

However, my daughter and son-in-law bought their property on terms (lease purchase), and my company and I have done a few AO deals (aka “assign out” deals, meaning we procure the buyer and assign them back to the seller and only create one payday as opposed to three). Aside from that, this office building was going to be the only other deal we’ve done of this sort.

Those deals we have done on island were a combination of yellow letters to free and clear, FSBO (for sale by owner) calls, and expired calls. Within the confines of the island, we really have to work all variables in order to secure these types of deals.

That being said, you can as well—regardless of your geographic area.

Proving Assumptions Don’t Pay

On a very busy main road in one of the towns on island, there was a huge “For Sale By Owner” sign that I drove by often. The gentleman selling was a well-known land owner in the area and has several large parcels on island.

I made the assumption that, if he’s in the business, he probably is looking for a conventional sale. Come to find out, this was a building that he owned and occupied for 22 years and had intended to save for his son. His son moved out of state though, so he no longer wanted to keep it.

The Realtor who was showing me office rental spaces asked if I was open to buying. I told her yes, so long as the seller was offering owner financing. She said she knew someone, and then introduced me to Alan, the owner of the aforementioned building on the main road.

Alan had handwritten details about what he was expecting for owner financing. It included a $50,000 down payment and an interest rate of 5.25 percent over 25 years.

While my company and I typically do not put large (if any) down payments on properties, and we typically do not pay interest on owner-financing deals (never until this deal, that is), I was open to working the numbers a bit. We were paying almost $3,000 for a lease after all.

Alan had the building on the market for $650,000 prior to this time. But it was now listed at $550,000.

Here are the approximate purchase numbers and details:

Purchase price: $550,000
Down payment: $35,000 at closing (on Nov. 1)
No payments of any type until April 1 of the following year, which enabled us to use what we would’ve on lease payments to make cosmetic fixes
$2,500 per month principal only for April, May, June, July (total $10,000)
$15,000 principal only for August
$490,000 balance at a 5% interest rate, amortized over 30 years with a balloon in the 20th year

Just the simple adjustment to the interest rate—down to 5 percent from 5.25 percent—made our new payment less than what we were paying for our lease at the prior location. Plus, the simple adjustment to principal only until September of the following year allowed us to realize a $60,000 reduction in principal in the first nine months.

This, of course, would never have happened if we started right away on the seller’s proposed terms.

Sweetening the Deal

With the building came two existing tenants. Neither had experienced a rent increase in 20-plus years.

The building has three floors. We planned to occupy the second and third, leaving rentable space on the first floor and in the basement.

One of the tenants was an insurance company that was only paying $500. But market rent for space of that size (I knew from touring offices before buying the building) was approximately $1,500 to $1,700. The second tenant was renting the basement space for $425.

I messaged both of them with the seller’s permission and told them I’d be purchasing the building, and their respective amounts would be $1,550 and $550. So, our income starting the day after closing would be $2,100.

Remember, we had no payments due December, January, February, and March. This meant $8,400 plus the $2,700 monthly we were not paying at the old location gave us approximately $14,000 free cash flow, which more than covered the April to August payments. All of this equated to no out-of-pocket costs on this deal after closing through the following September.

Knowing When to Play Hardball

The tenant who was to move from $500 to $1,550 emailed me back, arguing the price was too high for the space. Fortunately, I knew otherwise.

I also knew that, as a franchised insurance company, he wanted—and even needed—the location. It’s on a busy road across from a major store.

I told him there was no wiggle room but, of course, he didn’t have to stay. He requested a face-to-face meeting, during which I held my ground. He replied shortly thereafter that he would sign a two-year lease.

Now, keep in mind, our own entities would be renting part of the building, too. We signed leases with our LLC (that bought the building), agreeing to pay $4,000/month.

Rent details:

Total incoming rent: $6,100
Outgoing mortgage payment (once it started) and building expenses: Approximately $4,000
Total net cash flow: Approximately $2,100/month
Remaining open office suites, which would bring in an additional $1,100 once filled
Total net cash flow at capacity: $3,200

Steering Clear of Depreciating Assets

This method of investing is the perfect way to produce cash flow creatively. Money from these assets can then be used to fund other non-appreciating assets (like a new car).

This is something I’ve always preached to my kids, beginning when they were in high school. Instead of buying a car with after-tax dollars, aim to purchase an income-producing asset that can then fund your car (or toys or whatever).

Thanks to the transaction I explained above, I was able to utilize a small portion of that $2,100—soon to be $3,200—to purchase my next vehicle. The net cash out of my pocket to buy the car? $0. The net cash out of my pocket for my monthly payments on the new vehicle? $0.

Last Word: “Owner financing” to us typically means a home that is free and clear of any mortgages or liens. We buy it by paying the owner monthly principal payments—no interest. Although this deal was different, it’s a great investment, great cash flow, and—super important to any transaction—a win-win for us and the happy seller.

How do you feel about buying on terms? Have you done it? Did it work out well?

Comment below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.