Buying a building with $0

General Advice

OCT 29, 2021

After realizing my life’s calling lay in real estate - I’ve been asking myself: how do I grow faster? It’s one thing to buy and rent houses, but why put in a 100 hours of work for 1 house, when I could do the same amount of work for a 100 unit building?

There aren’t a lot of industries in which newbies can get scrappy enough to enter the space, but Commercial Real Estate (CRE) rewards creative people. Below are the 3 methods I’m exploring to acquire my first building:

  1. Master Lease Agreement (my fav <3)

An MLA is the hardest and easiest way to acquire my first commercial property. It’s easy because it doesn’t involve banks or credit, and I can get by with 0 cash down. It’s also the hardest because I have to put in a lot of work in finding the right seller.

In a nutshell, an MLA gives me equitable (but not legal) rights to the property for a fixed monthly payment. I’ll dive deeper into MLAs in another newsletter - so here’s an example for now:

Anne is selling her building for $5M, I don’t have the money to buy it. Anne agrees to an MLA over 5 years. We both agree that in 5 years, I’ll buy the property at her initial price while I give her a monthly lease payment of $5K. I now have equitable rights to the building; I’m responsible for maintenance, taxes, vacancy, etc. but also entitled to all profits - Anne gets to collect $5K/month and has no further headaches.

Meanwhile I save up as much as I can through the profits & purchase the building in a 5 years.

  1. Owner carry first mortgage

In an owner carry first mortgage method the seller/owner acts as the lender and the buyer signs a note with the seller (who holds title until the property is paid off). Even though it’s a great idea, it’s difficult to find a seller who is able to provide financing, because not only do I have to find a motivated seller - but she has to own her property outright. One of the benefits to the seller is that she can choose to sell me the property in ‘pieces’ in order to avoid a lump sum capital gains tax.

For example: Anne is selling her building for $5M and I don’t have the money to buy it. Anne can’t afford to pay capital gains tax on her property if she sold it right away (she bought it for $1M, tax on her $4M profit would be $1.6M). We agree to an owner-financing deal where I buy the property over a 5 year period, I buy 20% of the property every year (little or no downpayment). This allows Anne to pay her capital gains taxes over 5 years, while I own/manage/profit the building.

This kind of creative financing would only work if Anne really likes me, has a distressed property, and/or wants to delay her capital gains payment schedule.

  1. Owner carry second mortgage

The owner carry second mortgage is a derivative of the owner carry first mortgage in that both scenarios entail the property owner/seller financing the purchase for the buyer (me). The difference in the owner holding a second mortgage, however, is that this process still involves me getting some bank funding to finance the purchase.

Let’s look at the example again: Anne is selling her building for $5M and I don’t have the money to buy it. The bank wants 25% down to finance the purchase: $1.25M. I have $750k that I can put towards this deal. Anne jumps in, because she really wants to sell her property, and says she’ll lend the other $750k to meet the bank’s financing criteria - Amazing!

This way the bank’s happy, I’m happy, and Anne’s also happy.

As long as the deal structure makes sense, and all lawyers have blessed the paperwork, transactions can get as creative as you’d like, it’s why I really love this industry.

There’s inherently a large amount of risk involved with any transaction, because a lot can go wrong, but that’s why you do as much due diligence as you can. Yes, I take risks, but they’re calculated risks instead of shots in the dark.


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