Best Financing Method for Triplex Fixer-Upper

[Troy DeLong]

Property: Triplex
Layout: Main level = (1 unit) 2 bed / 1.5 bath 
           Upper level = (2 units) 1 bed / 1 bath 
Condition: Both upper units are messy (tenants) and rented under market value. The bigger, main level unit is not livable at the moment (Flooring all ripped up. Needs all bathroom fixtures and appliances.) Property appraised for $146k last year (2020) in the As-Is condition of the lower unit not being livable.
Status: Off-market property found through direct mail.
Seller Motivation: He doesn't "have to sell" but would consider it for the right price. Says he isn't losing any money but also isn't making any. The owner is getting older and is tired of being a land lord. He's not looking forward to having to fix up the lower unit. He won't sell for anything lower than the $146k appraised value. Or, that's what he says... 
Current Financing: Owner still has a loan on it. 

My question... What are some creative ways I could acquire this property, fix up the lower unit, get rid of the messy tenants, fix up their units, and rent this place out at market rents. Repairs are gonna be around $40k and ARV would be around $200k.

[Michael Temple]

If the landlord is getting older and doesn't need to sell then I would offer him a master lease to start. This is where you lease the entire building from him with the right to sub-lease it to the tenants. He still owns it and still pays the expenses, but you keep 10% (usually) and then return the rest to him. Then you essentially turn the building around by getting it cleaned up and rented for market rents. This should improve the cash flow for both of you. Negotiate the longest lease you can, 7-10 years is what I shoot for. This is a very low-risk way for you to get into this deal. If things don't work out you simply terminate your leasehold interests, but if things do work well and you enjoy working with the current owner you put yourself in an ideal position to put very favorable seller-financing in place down the road since you are the one that has been managing the building, removing his tenant headaches, and already sending him a check each month. Win-win for both of you. 

Once you do this for a year or two and prove you know what you are doing and that it does in fact make his life better you can approach him about seller-financing. He would likely be very open to this arrangement since you are the one that has been running this property for a couple of years. He knows, likes, and trusts you now. In a deal like this, you would be looking at a subject 2 to take over his existing mortgage and some payment plan to him for his equity. Remember you will need to figure out how much the house can afford to pay each month. That means need to calculate what monthly rental numbers look like and subtract out the subject 2 payment, insurance, maintenance, vacancy, and YOUR cash flow. The leftover amount is what you can afford to pay him for his equity.

On this second part, I have done a variety of terms from just offering payments with no interest to adding market interest BUT paying it only once per year on the outstanding balance. This will dramatically lower both the interest you pay overtime, but pay the loan down much faster and keep the payment down so the property cash flows. You can also negotiate to not have a due on sale clause or late fees in the second note. One of my mentors called this "squishy paper" because without all of those standard terms in there this note is not typically sold in the secondary market. Instead, there is a chance they will just sell that note to you at a discount instead down the road if they want to cash out. If they don't cash out you still have a favorable note on terms that make the deal work for you. So you buy your own paper back at a discount at some point in the future.

Once you own the property you can do all kinds of interesting things like selling a 1/2 undivided interest option in the property to raise cash. This is a good way to raise some money to improve the property and still retain some of the upside potential. There is probably a lot of other things you could do as well to set up the "deal beyond the deal."

I think it all starts with just really figuring out what the seller wants and how you can help them get to their goals. Good luck!