Lessons Learned from a 34-Unit Rooming Housing Project with a Lease Option and Creative Financing!
Hey BiggerPockets! I wanted to share the rooming house project I completed with creative financing, how the numbers worked out, and the lessons learned. Everyone involved in the project is someone I met here on BiggerPockets.
At the end of 2017, I received a phone call from my insurance agent, @Jason Bott, who said he gave my information to another client of his. His client was in the latter half of foreclosure and needed someone to help them complete renovations on a rooming house that they would ultimately take possession of. During the last few years, I’ve developed a reputation of being someone who helps people out of terrible situations of that nature. So, I agreed to speak with his client and see what can be done. That same evening, his client contacted me. We scheduled a time to walk through the building closer to the Sheriff’s sale date (March 2018).
Before I talk more about leasing and creative financing, it’s important for me to have you read the client’s perspective related to the entire matter. This information is available, in full, on my profile:
“My husband and I made a bad loan and ended up having to foreclose on the borrower. The building we took back was in need of a major clean-out, repair, and renovation before it could be put back in service. We knew we needed to find a reliable partner to work with on the project as we do not live in Milwaukee and don't have any experience or relationships with local contractors. The building had a tremendous upside if it could be filled and managed properly but there was a mountain to climb to get there. We were introduced to Michael Henry by our insurance broker, who happens to be another BP member. We had been talking to a few other interested parties when we met Michael but he very quickly set himself apart from the others by having a clear understanding of what needed to be done and developing a plan to get it done in the shortest amount of time possible. He also understood that the true value in the building could only be realized with proper management and he set about getting that into place. We put a lot of faith in Michael to run the project and he delivered. Throughout the process, he was quick to respond to any questions or requests we had, he did what he said he would do and kept the project moving along. When we came across the inevitable bumps in the road, he was quick to let us know and also usually had a creative solution already in the works. It was always our plan to get out of the property as soon as we could recoup our initial investment and Michael found a way to make this happen. We would definitely work with Michael again.”
What set me apart from others was my desire to not just learn more about the project, but the fact that I wanted to get involved to help the client feel secure in the fact that the renovations would be properly completed (and on-time) as well as understanding what was necessary to fulfill the potential of the property.
The first thing I needed to do was negotiate a lease option for the property.
Why did I choose a lease option? Because I wanted to create a win-win situation for the client and myself. I knew I didn’t have the resources at that time to purchase the building and also make the necessary repairs while maintaining holding cost. So, a leasing option made the most sense because it reduced expenses.
We agreed on a three-month lease term to complete the renovations. During that time, no monthly payments needed to be made. After the initial three-month period, my lease payments would begin. During the lease negotiation process, we settled on a three-year option with the right to extend the lease for another two years. And, yes, I did exercise that extension! The property was seller financed as a five-year balloon payment of 8% with a purchase price of more than $300K.
Once we completed the negotiation process, we signed the lease. Then, I started the work. The building was constructed in the 1980s. It has three stories and totals 8000 square feet. The built itself was quite efficient. So, our renovations consisted of installing new plumbing, upgrading the electrical, adding better lighting, installing security cameras, and installing all new flooring.
During this time, I also had to learn the Board of Zoning Appeals (BOZA) process and worked with different city inspectors. The biggest challenge here was working through the fire inspection and ensuring that all of its requirements were met.
The biggest lesson I learned was that everything takes longer than expected. I must say that how long I thought it would take to complete 34 rooms was definitely nowhere near the time it actually took.
Now, I have 14 rooms out of the 34 rented at $500.00 each. I negotiated a buyout and closed November 15th. I secured funding for this through a private lender. I brought on my partner, @Kyle Corkery, to see me through the finish line.
The plan is to get the building 90% occupied and refinance out with a value of around $650K.
