Turn-Key Lease Option Partnerships - a new lucrative strategy

[Shiloh Lundahl]

Hey everybody, 

I'd love to get some feedback from you about a new strategy that we are getting ready to employ.  But first I need to give a little background.  Over the past 5 years my business partner and I have built a portfolio of over 200 properties (around 80 single family homes, 30 units in multifamily, and about 100 units in mobile home parks).  The original plan when we set out over 5 years ago was to cash out in 2022.  So we decided to use the lease option strategy and created lease options to come due in 2022.  We have sold several properties so far this year.  We have taken that capital and cashed out some of it for ourselves as a long awaited payout and we have redeployed some of the proceeds into building our portfolio into the Triad area of North Carolina (Greensboro, Winston-Salem, and High Point).

Currently, we have about 8 properties on the market to sell.  So that means that we are carrying the costs of having these properties without renters and it is costing us probably around 10k a month in carrying costs.  We are starting to see a shift in the market in Arizona, due to higher interest rates I believe, and we are going into the winter months where there are usually less sales.  So rather than continue to bleed 10k a month, I think that we could easily lease option these properties and fill them with good tenant/buyers for 3-years at higher than market rents and then we would probably bring in around 14k a month in revenue which would help with cash flow.  However, we still want to cash out a little more and we want to continue to grow in North Carolina.  

Something important to know is that we have good debt on these properties at around a 4.7% interest rate.  So it would be a shame to get rid of the debt just to buy properties with a higher interest rate.  So here is our plan.  Rather than sell these properties, we are going to do a turn-key lease option partnership.  What that means is we are going to get a lease option tenant and then bring on a partner for each property, or multiple properties.  The new partner will buy into the equity of the property at a discount and will share in the cash flow and the upside.  Let me give you an example.

Here is an example with one of the properties that we have that is currently on the market in Coolidge, AZ.  https://www.zillow.com/homedet...

We sold a model match of this property a few streets over a couple months ago for 243k but this property has better flooring than the other property.  We currently owe 74k on this property but the market value is around 240k.  We have had 2 offers on this property but they both fell through, again I think it is related to the interest rates.  So here is our plan:

We take the property value at 240k and subtract 10% (24k) as a buffer for market corrections. We then take the 216k and subtract the current loan balance of 74k leaving 142k in equity left. We then bring on a partner who buys into the equity position at a 25% ($35,500) discount. In other words they buy into 142k in equity for only $106,500. This means that the partner on this deal would immediately get a 33% bump in equity. Then we would split the cash flow of $850 ($425 for us and $425 for the new partner) for this home which we would get by taking the rent that we could get on a lease option which for this property would probably be around $1650 a month (which number I got from the last lease option I did in this same city about a week ago) and subtracting $635 for PITI and another $165 for property management overhead and city taxes.

The property would have a 3-year lease option tenant that could buy the property at $259,900 or whatever the property appraises for (whichever is higher) within the next 3 years.  Any amount that the property sells for above the 240k current value will be split 50/50.  So there is also an upside possibility as well.  If the tenant buyer doesn't exercise the option within the 3 years then we can either just sell it or we can do another lease option depending on what is decided between us and the new partner.

The benefit to a partner would be that they get a turn-key property at a discount where they step immediately into an increase in equity and the property has a lower than market interest loan already in place.  And they get to partner with us and learn more about about investing using lease options.  The benefit to us is doing a partnership like this allows us to cash out a large portion of the equity while keeping good debt, and without taking on more debt, and we can turn the property into a great cash flowing property that is enough to share with another partner.

Thanks for reading this and I would love to hear your thoughts and or concerns about this new strategy.