Is there a way to make money on the property we are leasing with none of our own money?

Question

We are looking for suggestions on how we might be able to structure a deal with the landlord we are renting from, preferably with none of our own money.

CURRENT SITUATION

We have been leasing a home (3bd/1.5ba) in NJ for about 1.5 years now. We are not new to the area but we are new to this township and would like to continue renting till we find a house we think is a good investment. Home prices and taxes here are high and we would like to take some time to continue looking.

We are leasing a home from a couple that has moved back to NYC. The landlord has agreed to let us continue to rent through the end of June 2015, but they don't want to be landlords and want to move on. They have told us in the past that they have tried to sell the house for what they owe, but were not able to find a buyer. They have told us they would sell it to us for what they paid (no agents involved).

OUR DESIRED OUTCOME

We would like to find a buyer for the house and be able to continue to rent for probably another year. We don't want to move at the end of June and we don't want to buy the house to live in either because we are looking for something bigger.

OUR QUESTION

For example, we believe we could buy the house at the landlord's price, sell the house for $30-50K more than we bought it for and continue to lease at the same price we are leasing at currently and the landlord could probably gross about $500 per month after PITI. Is there a way to conduct this transaction so that everyone gets what they want? Even if we had to move with a new buyer, if we were able to make the transaction happen and walk away with a few extra dollars it would pay for our costs for moving (again), etc.

I think this only works if RE agent commissions are not involved. I know a couple of people in town who may know a few investors. The house is on a semi-busy street so FSBO sign may also help. I know there are things like back-to-back closings and option to buy situations, but have know idea to structure a deal that is fair and legit.

Maybe this is just a fantasy but many investors on BP seems to be able to structure deals creatively. Any ideas or suggestions welcome.

Many Thanks!

Jon Holdman · Answer

For one, a landlord needs to get a lot more than PITI for a rental to be profitable.  A rule of thumb banks use is that rent needs to be at least 1.33X the PITI to be break even.  That seems to assume self management.  With a PM, a better guideline is the rent needs to be double the P&I part of the payment to be break even.

No landlord is going to pay more than its worth.  So, step 1 is to figure out what this property is really worth.  And what the current owners will take for it.  A landlord is generally going to pay less for a property than a owner occupant.  So, don't expect to get a premium because its a rental vs. comps.  What are the actual numbers here?  What do you think you can sell it for?  What will the owners sell it to you for?  What's the rent?

Account Closed · Answer

Thanks for your reply Jon.

At one point before the end of last year the landlord said he would be willing to sell at $550. I believe we could get $600. This is the very low end for this neighborhood. Most homes are $1M+. There are two 3/3 homes nearby that have sold for $800 in the past year (last July/taxes about $15k). There is a 2/1 about 6 houses up the road listed at $549 (taxes $9k, small lot about 6500sf). This house we are leasing is cute, but it's small and the lot is also small (about 5600sf). Property taxes on this house are about $9,800. This is a town on the train line in and out of NYC and the school district is superb. There aren't many rentals in this school district and the current rent is $3800.

I understand how this may not work for an investor/landlord, and perhaps the question should be more about the possibility of flipping. I'm not sure. I just thought I should explore the possibilities before we just pack up and move, most likely, to another rental in June and if I'm going to present anything to the landlord then I need to do it sooner rather than later.

Best!

Jon Holdman · Answer

So, paying $600K for $3800 in rent is not something most landlords would be interested in.  That's seriously cash flow negative with a 20% down payment ($120K) and a property manager.  To the tune of $600 a month loss.  With self management, its about break even.  But you have $120K tied up in a property that's generating no return.  This is a pure speculation play.  Someone might buy hoping to sell it for more later.

As a simple fix and flip sort of deal the numbers aren't even close.  To sell to a retail buyer, you'll need to put it on the MLS.   Rest assured that you WILL have some amount of fixup to get it sold.  A house someone is living in is never "move in ready" for a buyer.  You'll have RE commissions and closing costs on both your purchase and sale.   Between commissions and closing costs you'll spend about $54K.  So, even without any fixup costs, you'll lose money.  You might be able to reduce that by $15K or so by using a flat fee listing agent.  But  you'll still have the buyer's agents commission and closing costs.

Is there a way to make money on the property we are leasing with none of our own money?

Most Popular Reply