Nothing hurts a real estate investor quite like writing a rent check, especially for their own offices. But there are subtle aspects of a deal that can help you buy your own space without disrupting your monthly budget.
Here I was with a successful real estate company and a teaching and training business, yet I was leasing our office building for $2,643 a month. As investors, once we know the proper techniques to buy on terms without using our own capital or signing personally and pledging assets, it makes any training we get all that much more worth it—especially if we can purchase our own home or office.
Looking to Buy Office Space
It may run contrary to the for-profit mode many get stuck in, but buying your own space is an investment in yourself and your business. Of course, it’s more complicated than simply wanting to own your own office. The timing should be right, and factors like location and room for growth should be considered. And then there’s the deal itself….
When we decided to look for a larger office space for ourselves to accommodate our expansion, the properties that matched our needs and wants were running from $3,800 to $5,000 per month—enough to make anyone cringe. So we started looking to potentially purchase on terms (which also happens to be what we teach other investors to do).
With energy focused in that area, results came quickly. A Realtor referred us to a property for sale by owner near a busy intersection. It happened to be one I drive by all the time, yet I totally missed this property.
The seller was not new to real estate and had obviously done his homework to find this prime location 22 years ago. Once we were introduced and talked more, he took care of the Realtor fee and chose to deal with me directly.
Negotiating a Terms Deal
In talks with the seller, I learned he owned massive amounts of real estate in the area (mostly land). He originally bought this property for his son to use, but his son had moved out of state. With both of us in the business and a sense of trust built by dealing directly, we did this deal without a purchase and sale agreement.
I’m a handshake deal kind of guy and would love to do more of them, but it’s just not safe or realistic to do with everyone. There was no deposit, and the seller gave his word he’d take the “for sale” sign down the next day. It also turned out our attorneys were in the same building, so we’d let them close the deal when the time came.
Breaking Our Own Rules
As I’ve often said, there are times when an experienced real estate buyer will pivot in a particular deal. Our own deal included several aspects, any one of which could be a useful and advantageous way to structure a deal of your own.
The seller was initially advertising owner financing with the property listed on the market for $650K. He wanted a 20 percent down payment and a mortgage of 20 to 25 years at 5.5 percent.
By the time we were dealing with him, the price was slashed to $565K. We came back with a slightly lower offer of $550K and different terms. These terms were based on me not wanting to exceed our then $2,643 monthly lease payment, and we reverse engineered our offer in that way.
At the closing, we put down $35K, which was coming in from ongoing terms deal as the first and third paydays as opposed to personal savings or business reserves.
Remember, when structuring terms deals the way we do—lease purchase and owner financing—we have three paydays. Oftentimes they’re over a set period, which gives us a nice projected payment schedule to count on for income and business building. I consider it a reallocation into a greater investment.
One of the more nuanced aspects to the deal was to ask for three months of no payments after the deposit. This was to avoid an overlap of paying rent on the leased space and on the new office space, and it freed up roughly $8,000 to use on moving and building improvement costs.
Just being free from paying double that first month and having available funds to get the new refurbished property to meet our needs was a great aspect to this deal, but we added even more.
After the three months of no payments, I negotiated four months of fixed, principal-only payments at $2,500 monthly—a rate lower than our previous lease payments. That put another $10,000 down on the principal.
While it may seem like this is purely delaying payment, we structured a large sum payment for month eight and allocated funds for our incoming terms deals to pay another $15,000 that month. A structured, reliable cash flow from our other deals made this deal possible.
We set the balance on the loan to start amortizing (including interest, which we usually don’t do in our investment deals) in month eight, not day one. So with that last payment of $15,000, the seller got the desired $60,000 deposit total and then it became more of a conventional amortization of the $490,000 balance.
Our new monthly payments toward the $490,000 remaining principal paid at 5.2 percent, which I negotiated down from 5.5 to keep those payments under $3K. Yes, $2,921 is north of the $2,643 lease payments we’d been making in our old offices, but we now owned the space and did not disrupt our monthly budget to get there. We also had three-and-a-half times the space and additional rentable suites from which we could profit.
There were two existing tenants in the building. Both were there over 20 years (remember, the owner had the property for 22) and never had an increase in rent. I met with them both and negotiated a $1,550 per month 24-month lease on one and a $550 12-month lease on the other.
So the month immediately following closing, we had a nice $2,100 income coming in to offset our outgoing cash. That $2,100 covers most of our payment (not counting taxes and insurance).
The Structure of the Deal
- $35K deposit
- No payments for 3 months
- Fixed, principal payments for months 4 through 7 ($10K applied to principal)
- $15,000 on month 8, stashed each month from terms deals and rent coming in from tenants
- Traditional monthly payments on remaining $490K
- Interest negotiated from 5.5% to 5.2%, so monthly payments were under $3K
- 20-year term
When the real estate market gets hot, it’s investors with negotiation know-how who get the deal. In The Book on Negotiating Real Estate, J Scott, Mark Ferguson, and Carol Scott combine real-world experience and the science of negotiation to cover the negotiation process and boost your odds of reaching a profitable deal.
Do you rent office space? Would you consider buying? Why or why not?
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