prepaid leaseback - transfer property with no money down?

Question

I don't know how feasible (and legal) this is, but I'm exploring options and thought this up:

For a deferred down payment do a leaseback prepaid to cover closing costs + down payment. I have this in mind to transfer properties to a credit partner, but it could work in selling a "turnkey" too I imagine.

Lets say a $70K property, closing costs of $17K with rents of $1000. Leaseback for 20 months at $850 (to cover managing and vacancies) and sub-rent it out. After 20 months start splitting incomes whatever the arrangement.

I believe you can only sub lease to the extent of your lease, so odd terms would mess up the lease, but sound feasible? Tax-wise would be beneficial to the seller too.  Could you deposit the prepayment directly into the escrow account you think?

Jeff Thompson · Answer

Don Konipol: I want to buy and hold, but as I'm leaving my overseas employment soon I wont have income to qualify for loans.  Which makes my choices load up on properties now or come up with some some sort of "credit partner" deal.

I see now this idea is flawed, it doesn't do what I thought. Maybe I should just go join the cash only guys in Ohio....

Don Konipol · Answer

I agree with Bill.  Just because something can be done doesn't mean it should be done.  My experience is that people who have no skin in a deal walk away fast at the first sign of trouble - even so called good credits.  I just don't understand how any of what you propose is any advantage over just buying and holding - you're getting a little more in a wrap note but less on a monthly cash flow basis.  So what's the point?

Bill Gulley · Answer

Jeff, that was more reading than I've done in a long time on one idea..........................

You have said you have cash, good credit and obviously you are willing to do some brain damage, if what you want is an income I'm with Jon, act as a hard money lender, do transactional funding for days not months or years....you'll make more than being a PM!

And yes there seems to be some tainted areas in you plan, as to funding with your "credit partner" what ever that is....a lender is making a loan to someone else with the understanding that they are putting money down....what the lender doesn't know is that it's being kicked back so that the borrower has no skin in the game and his closing costs are being paid for outside of closing....starts smelling at that point.

Why don't you just have an LLC, put others in the LLC in a passive investment and all the members just buy properties and you manage the LLC? Simple!

Seems all you are doing is buying a job. If you have good credit and cash just get with others like yourself and do straight up deals.....before you fry a snapse (brain damage...LOL).

Jeff Thompson · Answer

Sorry, I was in a rush to post before leaving work and obviously didn't explain myself well.

What I want to do is buy SFH's cash, rehab, then transfer them to "credit partners". I want to make it so they don't have to come up with any cash, only benefit from the arrangement.  This idea is another path along the same lines as http://www.biggerpockets.com/forums/50/topics/72998-credit-partner-arrangement---sandwich-lease, only this is lot more simple and has more options (I can sell outright too).

This method I'd sell kind of turnkey style, but as a "leaseback" (with sublet rights) that I'd prepay so they would get their down payment and closing costs back (maybe I could even pay directly to the escrow account?) so it would take no cash up front (they would need to have the funds available though).

Upon further thought It would need to be a NNN type lease so PITI and maintenance is payed by the me so the buyer has no expenses until after the leaseback is over, Then the buyer would get the property to do as they want (hopefully keeping me on as PM).  In this case as a NNN as my example before a $70K house renting for $1,000, $17k down payment, it would be maybe a 57 week leaseback at $300 monthly.

What I'm unsure of is if residential lenders (investor loan) would be ok with this type of lease and if it's all kosher.

I like this setup though, the buyer pays nothing then gets the property outright after a few years and I get all the cashflow until then, I sidestep my financing issue, and afterwards hopefully stay on as property manager. The buyer can pay the down payment and closing costs and be full owner right away as well.

Don Konipol · Answer

Are you trying to find a way to obtain control of a commercial property with no investment?  Or are you talking about something entirely different?

Bill Gulley · Answer

Jeff, you know what you're thinking but I'm not so shure...

It's common in commercial properties to sell and lease back the property. It often provides the income generating entity to write off the rents while the holding entity has the depreciation and breaks even or makes money as well. It also puts a spin on the liability issues for the tennant to the holding company. Other partnership arrangements as well.

But what is your goal? What are you trying to accomplish?

Can you prepay rents.....absolutely! A "deferred" payment? Yes, but why, what's it for?