A good question I get asked often is if you can lease option multifamily properties? The answer is YES, you can lease option multifamily properties. In fact, it can be a great way to grow your real estate investment portfolio.
Why a Landlord Wants to Lease Option a Multifamily Property
Lease optioning small multifamily properties is a great place to start. Three to four unit properties is a good place to look for owners willing to sign a lease option. These properties can have burnout landlords. They are too small to justify an on site manager but having multiple tenants can lead to multiple landlord problems. These may not be for the faint of heart investor However, three to four unit properties are still considered residential properties making the transaction simpler than for a larger commercial property.
Tenants blame other tenants for all kinds of things. Cars parked in the wrong place. Loud noises. Dog droppings in the shared yard. You name it and tenants complain about it. Landlords get tired of it and become more open to a lease option to hand off the responsibility quickly.
I however, know a few investors that personally don’t care for small multifamily properties. These investors prefer options on single family homes, commercial, or apartment buildings, but this is only because they have been investing a long time and have decided what they prefer as individuals. The down side to small multifamily buildings is the extra management required. One investor currently owns a duplex that has been turned over to a property manager because it became a pain to manage on a daily basis. That can work for an investor with a medium to large diversified portfolio when a small profit margin justifies having a property manager. At the same time, a newer investor may find this a good stepping-stone even when extra work is required.
The same problems also happen in larger buildings, but usually there is an on-site manager that keeps this level of detail away from the real estate investor. Single family houses don’t have multiple tenants and that keeps complaints to a minimum.
Larger Multifamily Buildings are Lease Option Possibilities Also
As most investors know, the separation between residential and commercial properties is between 4 and 5 units. Anything up to 4 units is considered a residential property. Anything with 5 units or more is considered a commercial property (for financing purposes).
You can certainly lease option commercial properties. The biggest difference residential and commercial is financing the property when you decide to buy. Commercial financing is very different from residential financing. You will most likely need a much larger down payment. Also, it’s common for banks to require you have 6 months or more in financial reserves. This means having enough financial liquidity to cover 6 months of loan payments, operating costs, and be able to cover financial emergencies.
Getting back to investing in small multifamily properties, investing in these gems with a lease option is a great way of adding long term cash flow to your portfolio. If a current owner wants out, a lease option can be appealing to him or her because they know traditional loans are tough for investors to get right now. However, everyone expects financing to loosen in the future. Proving your ability to manage the property during the option period increases the likeliness that you will be approved for a future loan. Also, sellers don’t always need the cash right now to buy something else the way homeowners do when they sell their home. A lease option can be a lifesaver for a burned-out landlord and a bonus for an aspiring new investor.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.