A sub-lease and rehab deal structure

5 Replies

Hi, I’m looking at a home that’s not been occupied for many years. I’m going to see if the owner is willing to sell, but I don’t think he will. It appears there is no loan on the property.

I estimate this property needs ~$30K of rehab for it to be ready to rent. I think monthly rent would be ~$2,000. I wanted to know if there’s a way to structure a sub-lease that would allow me to do the rehab, even though I wouldn’t own the property.

I thought if I was able to collect all of the rent for some period of time to recoup the rehab costs before I start paying the owner. If the owner wanted to sell the property after I fixed it up, I also want a way to recover the rehab costs by collecting some portion of the sale proceeds.

Does anyone have any ideas how this deal could best be structured if the owner was willing to sub-lease?

Thank you.

One option may be to create a partnership with the current owner. They bring the property, you bring the rehab and manage it for 50% of rents. If they decide to sell the property in a few years you would be entitled to either 50% of sales price or your rehab costs plus a %. Whichever is less. A second option would be to sign some sort of long term (10-15yr) NNN lease. Add to the lease a "right of first refusal" and you'll have the first shot at it if they do decide to sell.

@Dave Vona

sounds like you want to do one of those pre-sale reno's...  So, what are you looking to do?  Not buy the property, but fix it up?  If so, you are basically being a contractor so make sure your insurance and whatever local/state registrations or licensures are in place.

Or, this "sub-lease" question of yours is really you 'leasing the property' then really 'sub-letting' it with a rehab?  What is your restriction?  Lack of cash or ability to qualify for a loan?

Anyway, its certainly not ideal to do what it sounds like you are talking about doing.  Buyers, in my experience, normally don't make capital improvements prior to closing because of "what if you don't close."  Like I said, to make a business out of it, you need to have your licensure and insurances preapred (which may not be worth it for one deal).  Then, It sounds like you have two ideas in your post.  Your "first" about the sublease I'm still fuzzy.  The other idea about if the owner sells after the upgrades is either not well formed or not well communciated here.  I've thought about doing this sort of variant on the pre-sale reno, but it would require agreement with the seller and really putting a lien on the property to make sure you get paid.

Anyway, I really don't understand your goal and/or desired outcome.  Sorry I couldn't be of more assistance.

@David M.   Thanks for your reply.  Sorry if I wasn't clear with my post.  I was thinking about leasing the property from the owner, doing the rehab, and then leasing to a tenant.  I think the type of contract is a "master lease", from what I've been reading.  I would split the rent with the owner in some fashion.  I would need to recoup my rehab costs either through taking a higher percentage of the rents for a period of time, and/or making sure I was entitled to some of the funds if the owner were to sell the property.

@Dave Vona

Oh, like this:  https://www.biggerpockets.com/...  (take a look at the one question posted.... :)  )

Yeah..  that's too fancy/advanced for me.  It sounds like the MLO is designed to have a purchase option at the end of the lease.  Otherwise, what you are saying sounds about right, although just because the owner sells doesn't mean your lease is terminated -- something to be negotiated or check with your local/state laws.  Otherwise, your concern isn't much different to a commercial rental.  Sorry I couldn't help.  Good luck.