All Forum Posts by: John Divine

Very helpful Don, thank you!

Hey BP, I'd like to learn more about a purchase structure I don't hear about often: just a straightup option to purchase or purchase option agreement (NOT a lease option). 

In my mind, the agreement would look loosely like this: The option buyer pays an upfront fee to the option seller, giving the buyer a right to buy the property at any time between now and a certain date in the future, for a set price. I'm interested ideally in very long-dated contracts to take advantage of appreciation. So for example, you give the seller $5k upfront in exchange for the right to purchase a property (let's say worth $200k today) for $250k in ten years. The seller keeps that $5k no matter what, and it's not credited back at the time of sale. If you're familiar with stock options, this is exactly how call options work, although they only go out a max of maybe 27 months or so.

My questions are a bit numerous, but I've ordered them roughly in order of importance for me: 

-Is this legal? If so, has anyone out there done this and how did it go?

-Are there legal restrictions on this in NC, such as the length of the option?

-What sort of protections can be put in place for the buyer? I'm thinking of liens, backtaxes, making sure the seller doesn't sell to someone else, etc.

-Do folks have ideas about the best ways to source (i.e. find an option seller) for such deals?

-If these sorts of deals are doable (preferably in NC, but I'm open to other states as well), are there real estate lawyers specializing in this sort of thing?

Thanks,

John

I just closed on a warehouse that I expect should start generating around $7,000/month in cash flow in the new year. (If it matters for the question I closed on the deal with a 50/50 partner and we own the property through an LLC). Once we get a tenant and this cash flow starts coming in (Q1 2024), I'm looking for ways to leverage this into further growth.

Can we then take out a DSCR loan on this warehouse, which we bought all-cash, to put a down payment on another industrial property? My loose understanding is that banks look for a 1.25x DSCR, meaning we could take out a loan that cost us about $5600 monthly. Even if we took out a smaller loan, I would think we'd be able to get a meaningful DSCR commercial loan of between $400k-$500k (correct me if my math is wrong).

My question is: A) is this accurate? and B) would we then be able to put this sum to work as a down payment on another commercial property and fund a much larger purchase of a second property with another DSCR loan secured against the second property and the cash flows being generated by it?

It should be noted that the property we bought is a ground lease with 13 years remaining on it and the option to renew for another 49 years for a fee in 2036.

I'd be interested as well! [email protected]

Hey everyone, my name is John and I just joined up with the site. Been listening to the BP podcasts for a few years now and find them very useful and educational. They helped give me the confidence to buy my first home, my current primary residence, in 2021, and then expand the following year with a rental. This year I just closed on my first commercial property with a partner and I hope to keep this trajectory going. 

So far, I've invested exclusively in Charlotte, NC, which is where I'm from. I moved back here a few years ago after living in DC for 8 years.

My background is as a writer and editor covering the stock market. Frankly, I came to the conclusion in 2021 that I had been focusing on the wrong part of investing my entire life, and I wish I'd focused my attention more on real estate instead of the stock market. There's so much more creativity in real estate and your locus of control is infinitely greater in RE, where you can actually take action to impact the performance of your investments. 

In terms of an end goal, of course one day I'd like to leave the W-2 life, but I don't see that happening anytime soon and I'm perfectly fine with that. I consider myself a patient investor and understand that good things take time. Plus, I enjoy my job.

That said, my goal is to grow my portfolio. Right now, I see myself running up against scaling issues so I'm looking for ways around this issue. 

Here's a glance at my current situation and where I could use some advice:

I rent out half my primary residence for some extra cash flow (however, it doesn't cover the mortgage).

I have a rental property that offers negligible cash flow currently. 

I just closed on a deal to acquire a ground lease in a warehouse with 13 years left on it (it ends in 2036). This is the situation I feel like could hopefully snowball for me, but I'm trying to evaluate my options on how to move forward. 

Here are the details. Would be very interested to hear thoughts, suggestions or questions:

-Off-market property that I bought 50/50 with a partner. It's in a fantastic location in uptown Charlotte just blocks from Bank of America Stadium.

-I believe we got a steal. We closed on a ~5,000 sqft warehouse at $280,000. We closed less than two weeks ago, but let's assume the all-in cost is $320,000 after repairs.

-We have several solid leads on tenants. We expect to get a tenant at $17/sqft/year NNN, which is $85,000 annually ($7083.33 monthly). Of course, my partner and I split this, but I'm just giving the aggregate figures for simplicity's sake.

-I know this question operates on an assumption that we lease it. Let's just assume that's the case. 

-What's the best way to leverage this into further growth? My partner and I paid cash, so there's no existing financing. I assume it is, but is mortgaging a ground lease even possible? Let's say we take a DSCR loan at 8% over 11 years, with amortization also over 11 (this number is used bc the ground lease runs out in 13 years, I'm not sure if banks do odd years like 11). In this scenario, we could take out a $485,000 loan and have a monthly P&I payment of $5,536.49. The $7,083.33 in monthly income covers that debt almost 1.28 times, clearing the 1.25 hurdle.

-So, A) is obtaining this loan on a ground lease possible? B) Is it wise? I'm thinking we recoup the entire cost of the property upfront, then have some extra cash to play around with. On top of this, my understanding is that this money wouldn't count as income, so I'd avoid income tax on my half of the proceeds. Does that alone make it worth it? 

-Can we/should we secure a business loan against our leasehold interest (my partner and I have an LLC)? What little I've read seems to say that you could write off interest payments on such a loan if used for business purposes (e.g. the LLC could buy another cheap property).

-I am perfectly fine buying and holding too. Just seeing if there are ways to use the cash flows to grow my portfolio.

Further info on the deal: 

-We pay no monthly fee for the ground lease, which was secured for a 49-year term in 1987 for a lump sum payment.

-We have the right to renew for another 49 years in 2036 if we pay half of the assessed value of the underlying land. The tax-assessed value currently is $1.7 million; in 2036 it could be $3 million to $4 million. 

-If we declare we do want to renew the ground lease, the owner of the underlying land has the right to buy us out of that option for the value of any improvements on the property (i.e. the warehouse and any other improvements) for the assessed value of those structures. We think a conservative value of that in 2036 will be $700k.

Happy to join this community and looking forward to continuing my real estate journey here and to contributing what I can!