Leasing an apartment building

[Harrison Russin]

My older brother is an attorney in our hometown, and has a fledlging practice specializing in estates, trusts, and wills. He was approached by a client who owns 100 units in 10 buildings in our native area, Northeast Pennsylvania (NEPA) who proposed a business plan to him, which my brother then opened to our other brother and to me.

This client is 70 years old and wants to ease out of the business of rental management. I don't know many specifics, but my brother states that he does "all the work" himself. He would like to sell his buildings, but doesn't want to incur capital gains tax, so he proposed a lease agreement to my brother: my brother and his partners (i.e., the 3 of us brothers) would lease an entire building from him and sublease the units and pocket the cashflow.

My older brother put me in charge of doing the business and accounting research, so I started at our local library and quickly found Brandon Turner's books, as well as this website and podcasts. My interest has been piqued in real estate investing, and particularly rental property investing. 

Having engaged in reading about rental properties, I proposed to my brothers that we each save $1,000/month from our jobs and invest in two multi-family homes in a year, and save the cash flow from those homes to buy more homes in the coming years.

My older brother's preference is to take over his client's buildings. To him it sounds like "easy money," but I'm not sure it is. We currently have no specifics on his current gross income, cap rate, expenses, building status, etc., but hypothetically I imagine we could take in $100-150/unit/month in cash flow. Still, the lease agreement does not allow us to build equity in the building.

How does this lease/sublease sound as a venture for three first-time rental investors? I am skeptical, and would rather get our feet wet on a smaller scale. On the other hand, we would have the opportunity to learn the basics of management from an experienced career real estate investor, and perhaps slowly be able to convince him to sell his properties.

(On a more general note, I am becoming increasingly interested in real estate investment and am enjoying this hobby!)

[Richard Turner]

Buy the buildings and have the owner hold the notes. He pays ordinary income on the note interest and CaP gains on the principal he receives each year. 

You are not a management company. Leasing the buildings is a way to get you to manage the property, get around the real estate law and avoid a guaranteed commission for managing.