Seeking Advise: Funding Reno on a Master Lease Option

3 Replies

Hello BP Community, 

I'm considering entering into a master lease deal for a property that needs renovations in several units. I'm willing to manage all of the renovations. However, I'm a bit unsure as to how to structure the agreement in regards to who should fund the renovations. I want to make sure the deal is mutually beneficial. My initial thoughts are:

1. If the current owner funds the reno, we can add whatever additional money he put into the property (during our lease period) to our purchase price at the end of the lease period. 

2. If I fund the reno (during my lease period) and I don't end up purchasing the property, I will be out a great deal of money without receiving the reward of my extra investment. Is there any way to protect myself from this exposure? 

Any advice would be greatly appreciated! 

All the best, 

Sam 

Generally speaking I would only vote for the first option, since I don’t see a way to cover your investment in solution two other than purchasing the property at some point. If your owner doesn’t play I would route for the following...

The following strategy might be an interim idea hat gives you the option to test all waters. It sure was a charm for us.

Depending on where your property is located I would outfit a 2BR unit fully furnished with new contemporary IKEA products. They give you up to $5K credit, deliver the whole caboodle and you can have them set it up or do it yourself.
From experience, I vote for paying them to set it up because this is more realistic should you scale it up. You won’t have time to build furniture in the future, you need to focus on being the director of the circus.

Install smart remote WiFi looks (LockState), NEST thermostat, smoke- and carbon monoxide detector, make the place business ready (printer, desk, etc.) and start an awesome looking listing on Airbnb for free.
Depending on your area, Airbnb even pays for the photo session, If not a professional photo session shouldn’t cost more than $300-$400.. this investment is crucial because it doubles your bookings. Make sure the descriptions and guide book on your listing are fabulous. This is important because it also improves the attractiveness of your listing and increases bookings. Use keyword rich content when crafting your descriptions.

Check out what other people are renting their places out for on Airbnb and compare it to yours and adjust pricing accordingly. If this starts picking up, it’s worth adding your listing to one or two other major marketers: VRBO and HomeAway. In our years of testing and experience, adding listings to more services is not worth the effort, by far, in terms of return on investment. The three majors are more than good enough to make a business.

This strategy worked like a charm for us when we first started years ago. It took off and we expanded by using the income of the rentals to furnish the next unit. Once you see a trend and feel more comfortable with the whole process you’ll get better and faster and you might even think of getting a bridge loan of some sorts to go bigger faster.

This way you can also figure out if your line of thought is heading towards a way where you can make better decisions on a property purchase or not.

Should this whole thing go south in whatever way, you can always resell the furniture and go back to zero. By the way, IKEA has a one-year full refund guarantee – go figure.

Yes you will have paid some “tuition“ but have avoided paying for a full-fledged renovation, gained certainty, and you’ve gained a lot of intelligence: is this strategy feasible, how does the area react to short term rental, is this a viable strategy to think bigger not just for this investment but for future investments.

Let me know how it goes ;-)

There’s another challenge you need to be aware of should you ask the owner to finance or perhaps even just co-finance a renovation. Once they see the value you are creating, they might wake up out of their coma and kiss you goodbye or cause friction.

Meaning, your attorney really needs to nail all this down in a watertight agreement in order to avoid that the owner suddenly sees the gold himself.

You’ll definitely want to secure everything before you head on into this mission. If the owner doesn’t play ball with you, and writing up an agreement will test that, then I only see the above Airbnb strategy to minimize your risk but move forward with your dream nonetheless.

Thank you very much for that detailed and thoughtful reply @Ken Breeze !

I really appreciate you taking the time to share your insights. 

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