Leverage Buyout

2 Replies

Hello biggerpockets members. I'm relatively new to the site and have been passively reading on the REI business for a few months now. Obviously I have tons of question and I am sure some of them may be out there. I've been looking into no to low money down strategies for investing and I came across Leverage Buyouts. I wondered is it at all possible if a home with no mortgage or low payoff balance can be purchased using leverage buyout. Again I'm knew to this so I don't know if this is a "dumb" question. If it is possible does anyone have experiences they can share?

First things first, let's get on the same page about, what is a "leveraged buyout." An LBO is a transaction that structures debt and equity to purchase an asset (such as a company or property), where the target acquisition's cash-flow acts as collateral and service for the debt assumed to complete the deal.

In a very plain way, a typical residential mortgage is a kind of LBO. You contribute some amount of cash, and borrow the rest. The underlying asset (home) and your personal cash-flow (salary/wages) act as collateral and a way to service the debt. So strictly speaking, just about every non all-cash real estate deal might be called an LBO. 

But to call it an LBO and not have people smirk or roll their eyes, will involve commercial transactions of at least middle market level (anywhere from $10m-$25m up to say $100m). That means underwriting, syndication, securitization, etc. In other words, Wall Street. I've done a few of these, and while worth it in the end, believe me when I tell you that the page count on these things often goes into the low thousands.

Success with these things always involves having a good lender relationship, a good economy, and vetted principals (that is, no one questions your or the management team's abilities), in addition to a solid property and business plan for the property.

You will not have any luck with this sort of thing if you're new to commercial real estate, and/or the property is small or not cash-flowing. A shopping mall, hotel, or 400-unit student housing development fits the bill; a suburban SFR rented out to a family of four does not.

Leon D. 

Thank you for explaining this in detail. This helped clear up a lot of questions. 

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