Lease options are a great tool to use when building a real estate portfolio. When we are discussing apartments or multiple properties, we use the term “master” lease option. Here are a few tips to getting started using MLOs for multifamily deals.
1. Analyze the deal as if you are going to buy it with debt
When you start looking for real estate deals, don’t look for deals that you can do a master lease option (MLO) on. I know that sounds backwards regarding the title of this report. When looking at deals you need to analyze them as if you were going to buy them with a mortgage. When you do your financial analysis and you realize the deal doesn’t work financially, you them analyze it to see if an MLO would work to get the deal done. The reason I say start the analysis with the debt approach is for several reasons-
- What if you want to purchase the property as your exit strategy to exit the MLO? Good to know what that analysis looks like before you go into the MLO (know your exit strategy). Keep in mind if you want to sell the MLO contract, your buyer will do the same analysis.
- Keeps you conservative. Just because you can do a master lease option deal doesn’t mean you should. If you wouldn’t be comfortable putting debt on the property then don’t close it with an MLO either.
- Knowing the exit strategy for your MLO is imperative. Analyze the deal as if you are going to buy it with debt, sell it, wholesale it, or just operate it yourself. This will give you a clear view of the deal and its operations.
2. Make a problem-solving offer
If a property is great shape, cash flowing, in a great area and reasonably priced…why would a seller accept an MLO offer. They won’t. If you want to be successful in getting your offers accepted your offer needs to solve a problem. If the seller doesn’t have a problem, they are less likely to accept your creative offer. Your job is to find sellers with needs. If the seller has an issue that needs solving then your offer is much more attractive. Here are a few reasons a seller may want to accept an MLO offer.
- Seller is tired of managing the asset or tired of existing management.
- Seller does not want to take a full tax hit for the profit at sale.
- Seller has inherited property and never meant to be a landlord or investor.
- Seller wants “rent payment” your MLO will create but doesn’t want to deal with the asset.
There are an infinite number of reasons someone would want to sell their property. These are just a few. Look for the sellers underlying reason for selling before you make your MLO offer.
3. Create massive deal flow
The more deals you analyze the faster you will find a seller that will agree to a master lease option offer. Consistent deal flow and analysis is the key to all real estate investing. You have to know the values of the assets in your market and you need to watch the market regularly. If you do this you will know when a seller is selling a good asset at a discount. No matter where you live or what market you are looking in…there are always deals somewhere. Realtors can be a great source of apartment deals but using a MLO can be a bit tricky here. The main focus when offering a MLO through a realtor is to get the realtor on board with the offer first. The best way to do this is to show how they will get PAID!
To learn more about Master Lease Options, sign up for my Master Class on Creative Financing.
