Where's the money in a master lease on the fourplex two doors down?

Question

I own a small triplex and the woman who owns the fourplex two doors down is tired of managing it. She floated leasing the whole building to me for a flat $4,400 a month for three years, with an option to buy at $520,000 at any point, and I sublet the units. Current rents there are $1,150, $1,150, $1,200 and one vacant unit she's been sitting on. So $3,500 collected against $4,400 owed, which is backwards. She says the vacant unit and below-market rents are the whole point. I follow that in theory but I want to know what I'm actually signing up for before I get excited.

Rena Guide · Accepted Answer

A master lease means you lease the entire building at a fixed price and then rent the individual units out yourself, keeping whatever's left after your payment to her. Your profit is the spread. Right now the spread is negative $900 a month, and everything depends on whether you can close that gap.

So work the gap. Fill the vacant unit at, say, $1,250 and you're at $4,750 against $4,400, a $350 spread. Bring the three occupied units toward $1,250 as leases turn and you'd be at $5,000, so $600. That's the whole business case, and it rests on those market rents being real. Pull actual comparable rents for that submarket before you agree to anything, because her opinion of what the units should get is not evidence.

What the numbers above leave out is that the $900 shortfall is yours to fund from month one, plus turnover costs. If it takes four months to fill the vacancy and each turn costs $2,000 in paint and cleaning, you can be $8,000 to $10,000 down before the spread ever goes positive. Have that money set aside as cash, not as a plan.

Also get clear on who pays for the water heater. On a master lease the maintenance split is negotiated, and a building someone's tired of managing often has deferred work waiting. Ask for a dollar cap on your repair obligation.

Keep the option to buy at $520,000 in a separate document from the lease. If you fix the rents and the building appraises higher, that option is where much of your upside sits.

diane_kowalski · Answer

The three-year term against your rent plan is the piece I'd stare at. If two of those leases don't turn until month 20, you're carrying a negative spread for most of the deal and the option is the only thing that pays you.

nicole_adeyemi · Answer

Check whether the zoning and the certificate of occupancy actually cover four units. Plenty of "fourplexes" are legally three units with a converted basement, and that comes out when you go to exercise at $520,000 and the appraiser counts rooms. Whether an unpermitted unit can be rented at all depends on your local code, so read the ordinance rather than the rent roll.

paulgrant17 · Answer

Ask why the unit's been vacant. A landlord who's tired of managing usually isn't sitting on a rentable unit for fun. If it needs $15,000 of work, that changes the whole spread math and she's handing you the bill inside a lease payment.

Where's the money in a master lease on the fourplex two doors down?

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