People are a part of every deal, but in one recent case, we added a legacy tenant and their rent to the package. We were really happy to have them in this multi-structure property, because we used it to sweeten the deal for the buyer.
Property: Lake View
The Connecticut property, which we call Lakeview, can be a main residence or a vacation home—one with a stellar view of the lake, hence the name. The seller was using it as a second vacation home, across the country from his main residence.
The house included a downstairs legal in-laws suite. Also on the property was a detached garage, with a one-bedroom suite above, which a family friend was renting while overlooking the rest of the property.
Connected: How we found an extra $400K on two properties
Deal Summary: Lake View
The seller had inherited everything as part of a family trust, but distance and a life event had prompted him to sell it. This deal is different from our average terms deals because it was full of principal and monthly payments.
The way we structured it with our buyer, we got a substantial portion of our proposed profit from three days payment. It happens on deals, but I’d say only about 10 percent of the time with a high down payment (payday number 1) up front or over time.
Here were the specifications of LakeView:
Purchase Price: $399,000
Monthly: $1,000 principal payment only x 48 months
sold: $429,900 (monthly lease = $1,750)
Payday #1: $80,000 ($20,000 upfront and three more $20,000 payments every 6 months for the first two years)
payday 2: $26,000 ($550 monthly spread (rent minus $1K monthly for seller and insurance payment)
Payday #3: -$2,000 ($30,000 markup + $48K in principal payment – $80K payment)
Total: $104,000 ($80K + $26K – $2K)
The Lake View property was in a high tax zone, but to be clear, we do owe taxes to our buyers, so their total monthly is about $2,750 of which $1,000 is taxes.
Connected: Lease-Purchase Agreement: What if there is an existing tenant?
The Icing on Top: An Inherited Renter
Remember that other structure? It turns out the seller had a family friend living in the unit above the garage, paying about $700 a month in rent.
We met him. He was a great man and interested in living in the property.
We took this news to the buyer, who would eventually inherit that tenant. We explained that they could only collect that rent when their total reached $20,000, at which point, we knew they had $40,000 in the deal.
It added some incentive for them to stay on time with the rent (part of the criteria for reaching the point of accumulation), and it generated $700 more monthly cash flow for us (not factored into the $104,000 above) until the time Don’t get hit to take them.
That tenant represents a revenue stream, another pay day in fact, so we put Carrot at risk by agreeing to hand over their rent to the buyers after they made a second down payment of $20,000. This will happen six months after the deal.
During those six months, we actually collected $700 per month from that tenant, which totaled $4,200 and increased our total profit on the Lakeview property to $109,000! Yep, that’s a six-figure profit, even after negative payday number 3 – an impressive deal.
Next, we talked about the sale price and terms of the $429K in the review of the sale. We felt we could have tested the market more. However, completing the deal in three weeks provided peace of mind and the ability to move on to the next deal.
Imagine what a six-figure profit deal could do for you in a few years! It’s not unheard of when you look at real estate as a business and have effective systems in place, but it does require hard work and smart work.
Do you have any questions regarding the above transaction? Would you ever sell on terms? why or why not?
Leave a comment below!
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
