Multifamily Acquisition Startegy

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Multifamily scenario, looking to see if anyone has had similar deals/experience with this strategy.

Original developer 1965-1990 (phased construction) still owns a great product I’m trying to buy. Market rents are 70% higher than current tenant base. Owner is in his mid-80’s. Not interested in selling at my price due to capital gains. Kids inherit the money or the property. Cost basis becomes market value at inheritance and the kids wouldn’t have to pay capital gains. Only selling advantage is to no longer manage the asset. The kids end up doing all the maintenance, they’re not in the business and don’t have high interest. Planning to sell at inheritance point.

My latest offer was a lease-option. I lease the property with closing set 10-15 years, or on passing of original owners. I take over everything and pay them roughly 80% of annual cash flow. No debt at acquisition, would only require cap ex reserves and operating funds.

The owners kids seem interested in this strategy. Makes sense for me because very low cash out, rent pays master lease, I’m highly confident I can bump as-is rent and increase annual cash flow with low cost. (I own 2 similar properties nearby and achieving 2x rent comparable)

I would plan to own this asset forever. I love the location. So 10-15 years before closing is fine with me. Also this gives me great runway to own this 100% without investors and I have ability to close the purchase on my own when closing inevitably happens.

Looking to hear thoughts and feedback on this strategy and if anyone here has done something similar. Thanks!

@Tory Sheffer , how long have you owned similar assets?  10-15 years is a long time, and a lot can change in that time, for you, the seller, and the seller's kids.

Again, this sounds like it could work out well for all parties.  Personally, I would only do this if there were a set exit price, as operating it for 15 yrs, and raising the rents is great, but without a contractually obligated purchase price up front, you will be doing all the work, and the kids could walk away with a majority of the reward.   

@Evan Polaski it would be set purchase price at time of contract. For example, $100k annual lease, $2.5M purchase, lease payments to be credited towards purchase price at closing. I know the area well, extremely close to home, location not a concern at all.

@Tory Sheffer interesting approach. Sounds like a win-win. My only advise would be to have an attorney draw up your paperwork and perhaps have their estate planning attorney review and sign/acknowledge it somehow. Perhaps the kids too?

@Tory Sheffer sounds like a good strategy. I had been considering something similar on my commercial plaza a few years ago with an almost identical sounding owner/children/capital gains scenario.

Ultimately the previous owner ended up just selling to me but with a low down payment and he is holding the note. He built the plaza in the 70’s and had no debt on it so he was able to do this easily.

I’m not a tax expert, but in this scenario he only had to pay capital gains in the first year on the down payment portion and then in subsequent years he pays cap gains on the principal portion of payments he collects. If he passes away before the loan hits maturity, his children inherit the note and pay no capital gains.

The benefits for the seller are that I was less likely to back out years down the road or running into a situation where I just couldn’t get a loan at the time of purchase or any other external factors that could have prevented me from executing the purchase.

The benefits to me are that I own the place today, am paying down debt and building equity and I got to use massive bonus depreciation to help my personal tax situation.

One thing I would recommend either way is have a couple banks look at the deal today to give you an idea of what they would like to see when you ultimately need them to finance the purchase or refinancing. An environmental study may not be a bad idea now for example so you know you won’t run into issues later on.

@Tim Delaney that’s very good insight thank you! My plan was to do Environmental’s and all normal DD as if I’m purchasing as well. One thing with this route is the all lease payments would go towards the eventual purchase price. For example $2.5m agreed purchase, $100k annual lease. In 10 years I would owe $1.5M to seller.