How to offer landlord a win-win deal for 5 properties at $2.5M?

Question

Hello BP!

The Portfolio: Five multi-families (All 3 units, excellent tenants, excellent locations, well-kept). Purchase price: $1.3M. Value today: $2.5M

The Background: My landlord (let's call her Sara) owns 5 properties in West Hartford, CT and she wants to sell all her properties.  A few months ago I reached out to Sara and asked her to be a mentor as I began my real estate investing journey.  I've been listening to BP podcasts, going to local meet-ups, rapidly digesting books, building relationships, researching markets and seeing properties.  In other words, I'm hungry.  Also, I work full time as an engineer. The Need: How can I go to Sara with an offer that is beneficial for her?  Can I build my case around helping her avoid capital gains tax?  What are the benefits of selling to me now that outweigh waiting 30 years for a $2.5M pay-out?  The motive for Sara is she does not want to manage these properties anymore.  The disadvantage for me is I don't have 25% of $2.5M.  Sara has made it clear if I can present a case which is beneficial for her to sell the properties to me, she will do it.

I welcome all feedback, comments, constructive criticism.  Bonus points if you are an accountant in the CT area :)

Annie Pitkin

Dave Foster · Answer

@Anne Pitkin, If she is tired of management then a traditional 1031 into more managed property might not be to her liking.  But the 1031 can be used to go into NNN commercial or a delaware statutory trust that are passive options.

It may be possible to combine a partial sale and partial owner carry and a 1031 all together.  It's a scenario that just has to be fleshed out according to her desired outcome.

Peter M. · Answer

@Anne Pitkin Have her seller finance to you. Her capital gain hit will be smaller since it is spread out. You'll have to offer her better terms like higher interest rate but remind her that if you fail to pay she will get the properties back.

Jonathan Greene · Answer

If she is a number-cruncher, you can diagram the capital gains savings by doing seller financing to you in an easy-to-see, glaring savings on a Google sheet. You are already in a perfect conversation and approaching it in just the right way. You always want to be asking her the things that would make it a win-win for her and I think, as others have said, finding something she could 1031 into would be the cherry on top.

Jay Hinrichs · Answer

OK try this one.

do a long term lease option were you take over management  the thing she dislikes.  the positive cash flow goes to her in the form of option payments to reduce principal and are tax differed NO tax on it.. Then at the point you can buy it and cash her out she can pay tax at that point but in the mean time she gets tax differed income with no management issues and you have a bonafide equitable interest.

Anne Pitkin · Answer

@Jonathan Greene Thanks for the feedback!  I definitely agree the biggest benefit for my landlord is in the capital gains.  It will be tricky to 1031 exchange 5 properties into 1 but I'm researching that as well now.

Anne Pitkin · Answer

@Dave Foster Agreed, there are a variety of options here. I'm trying to gather information to present the best case for her (and me, if I decide I want 15 units).  I will look into both NNN commercial and delaware statutory trust.  Thank you for the fantastic ideas.

Jason Shackleton · Answer

@Anne Pitkin

Seller financing could be an option but she might want the cash now. Also as @Dave Foster mentioned she likely does not want to get into managing more properties if she doesn't want to manage the one she has. She has told you her main pain points so that is great.

Look she will be getting access to a big chuck of equity even after taxes. Perhaps she could downsize her portfolio to a point where she will have an even higher equity position in. This would allow her to hire out a property management company. Or heck If you really really want this deal you could offer to do the day to day property management at her new property for a very fair price for a number of years. There is an irresistible offer you can put on the table that hits all her pain points that she won't find anywhere else. You just need to find out how that can work creatively. Heck I manage my own 6 unit, 3 property portfolio. It isn't rocket science. Also considering the properties she owned are upper class with A+ tenants likely...what real day to day management would there be if any lol?

Anyways good Luck

Anne Pitkin · Answer

@Scott Watson Excited you are in the area! I definitely like the 1031 exchange idea.  I researched it a bit and it looks like all 5 properties could be exchanged for 1.  The difficult part will be finding the 1.  I'm also not sure why she didn't already consider this.  Thanks for the feedback!  Good luck on your multi-family search!

Re: local meet-ups - I recommend the monthly New Haven meet-ups. @Ryan Luby is the fearless leader!  Although maybe it's time we start one in West Hartford :)

Scott Watson · Answer

Sounds like you already have a lot of great ideas for her. Another idea to bring her value... How about finding her a property(s) with similar or better potential that would be easier to manage that she could acquire through 1031 exchange. Do the legwork to explain the tax benefits and research the best service to manage the exchange. Are you willing to work with a partner to raise the capital you need?

I’m also in WeHa looking to start my REI journey. I’m thinking my first step is owner occupied multi family. I’m impressed with your ambition.

Anne Pitkin · Answer

@Jay Hinrichs

I like this idea! I live in one of her properties now and would love to buy it.  Although I don't want to live in it long-term I could certainly afford double my rent and put that toward a rent-to-buy agreement.  Thanks for the feedback!

How to offer landlord a win-win deal for 5 properties at $2.5M?

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