Johnson City, TX · Member since 2017 · 59 posts · 135 votes
In 2017 we built two rental homes on land that my parents own (they have 5 other rentals on this property). It's 12.8 acres outside the city limits of Kyle, TX (if that matters). We lease the land at 5% of the rental amount (so $120/mo for both houses) plus $20/mo *per house* for water and trash. We do have a 99 year lease with my parents. All of this is really just for the legalities of their will.
Anyway... we built these with cash and do not owe anything. We are hoping to use them as collateral OR cash equity when we go on to our next investment (RV and boat storage). Does anyone have any ideas or tips or experience on how we can do this with leased land?
We would like to build more in the near future it's not the best ROI (33% per year vs 45% per year for RV and boat storage) - but to build these is considerable less money (about $35k per house) vs RV and boat storage ($1.5m for the land, development, etc)
So IF we can get equity or use them as collateral towards the storage investment then super... but if not, then is there any point in building them right now?
While I’m not a lender or an attorney, I have seen similar situations as you describe here and have 20+ years experience analyzing leasehold interests.
Unfortunately, your options for financing are limited because you don’t own the land under your improvements. Unless the tract has been previously subdivided, you probably can’t sell your portion of the property and anyone who wanted to buy it couldnt except for cash, and assuming your ground lease, for which they’d expect a huge price discount.
There may be private lenders out there who loan on leasehold interests, but I doubt you’ll like the terms or they’re going to base the loan amount on anything near the fee simple interest or cost of the improvements, without a lien on all the land.
At this point, you probably can’t refinance your properties without your parents subordinating their interest in your leased land and your parents signing on the loan, which would likely be secured by the entire property. If that works, great.
If in your present situation, I would hold off on any other construction on this land until I could visit with my parents and an attorney to try and change the lease agreement into something that would maximize the value to YOU of any improvements you place on the land, now or in the future.
If it was just so you had a place to build your own house, the lease might be ok, but there are a number of better options than this lease for an investment property.
An easier option mat be to convey your parents RE interest into an LLC for the entire property and divide the ownership based on the value each party has at this time. They can leave their part of the LLC interest to you in their will. Check with a CPA of course, but I don't believe an LLC conversion would trigger a tax issue. It's also possible they could subdivide the tract and sell or gift you the underlying land.
You’ve done a great job of developing income producing real estate and it sounds like you’re on your way to more success. Being a pro investor means never skimping on expert CPA and Attorney advice as to how to maintain the long term value and appreciation of your RE investments. If their advice doesn’t sound right, pay for a 2nd opinion.
BTW I grew up hearing folks say a 99 year lease is the same as pure ownership, but this is simply not true as it is much more difficult to finance and sell in the open market.
Marketability is everything when you’re talking about real estate values.
@Molly Morlino if you built a permanently attached building to someone else's land then technically they own that property. The only people who could use the equity in that property are your parents. See if they can go and get a loan for your next items. That's the only solution here that I can see except for borrowing money from an individual who may not mind how you have it structured. Good luck!
Look into replatting/subdividing the land to get discrete lots with value, lenders dont like to cross multiple businesses or large acreage either. Lots of options, but as mentioned, mostly for the Owners.