Free Options (47% Cash on Cash)
Late at night, while searching old listings, I came across an ugly old warehouse in the heart of where I was investing. At 5,000 square feet, and with another 5,000 square feet of parking, the asking price of $300,000 was around what raw land in the area was worth.
I texted the broker, and the conversation went as follows:
The terms of the contract were phenomenal. I got a recorded contract to purchase the property two years from the date of contract signing. The deposit was due sixty days before the anticipated closing date, and I had a due diligence period beginning at the end of the two years, during which I could terminate the deal "for any or no reason." Basically, I had a free two year option on the warehouse with no money down.
Towards the end of the second year, the seller was still fulfilling work under a large contract, and asked for an extra six months, which I gladly gave him. In the interim, the value of the land had risen significantly, and I had preliminary plans in had for a 40-unit development. At the end of that six month period, we began our due diligence and financing with an anticipated closing in the near future.
During those two years, I had began two developments a couple of blocks away, and was able to utilize the warehouse upon closing for staging of materials. I signed a lease between my development company and the single-purpose entity closing on the warehouse, and was able to obtain 80% financing on the property. The reason my bank was willing to give such high leverage, is that the warehouse appraised for $375,000 with the assumption that it was a vacant space. The bank recognized, that with a lease in place, it was worth far more than that, and their risk was low. I also got 80% financing on the $75,000 capex budget which I presented, in order to bring the warehouse into the modern era.
Within 48 hours of closing, I was both utilizing the warehouse, and in the first stages of renovation. I cleared and painted the interior, and built out a new office and bathroom. I repaved the parking lot, painted the exterior, put up new fencing, lighting and security cameras, replaced the steel gates, and clad the frontage in graffiti-resistant porcelain. Just as the renovation reached completion, I was able to vacate the warehouse myself and list it for lease.
Upon vacating the warehouse, I was able to lease it for $7,000 per month. With annual taxes at $10,000, insurance at $2,000, and a mortgage payment of $15,000, I net over $55,000 a year. My total cash in is $120,000 between the down payment and renovations, so the cash on cash for this deal is over 45%.
When a property is off the market, try to structure around the seller's hesitations to sell. Other than locking up the option, there was no ingenuity in this deal. The leasing market for warehouse rents doubled during the two and half years I had this locked up, and that alone accounts for the outsized returns.