You’ve likely also have heard that long distance real estate investing can be a nightmare. (Even managing your rental properties locally can be a pain, much less 2,000 miles away.) There may be a solution, however, for easing into a market in another country without the traditional start-up bumps and bruises or expenses associated with traditional rental property. The market is Texas. And the strategy is leasebacks.
What are leasebacks?
Leasebacks are (for now) the best kept secret in Texas real estate investing. Leasebacks in most cases are homes that are occupied and maintained by the builder’s sales staff or tenants they manage. They may use the home as a tool to sell and showcase their products or they may place a tenant and manage it themselves. Either way, the builder is responsible for all rent payments and management of the property during the lease. Best of all? In Texas you can buy one of these starting in the low $100’s.
Why builder leasebacks?
Get ready for some astounding facts. With most leaseback programs there are no property management fees, no maintenance costs, no repair fees, no utility deposits or payments. There’s also immediate income from day one, reliable rent payments, homes at discounted prices, and a builder-assisted exit strategy. If you are looking for a simple way to invest long distance it will be hard to beat builder leasebacks. It’s really a very simple and secure way to invest in real estate, especially if you are a long distance investor. If you have ever taken a pencil to the fees and expenses you incur for a typical rental home over two years then you know where most of you cash flow actually flows: usually right out of your pocket. Typically, with builder leasebacks more of the cash flow you earn is the cash flow you keep.
Who is buying builder leasebacks?
These leaseback deals are out there if you search hard enough, or better yet, know someone who has those connections. A large portion of leasebacks are sold to long-distance buyers. Most of the investors I sold traditional rental properties in years past are converting to builder leasebacks almost exclusively. They tell me they feel more secure than with empty rental homes and will have more secure cash flow and a higher total return over the long haul. No expenses related to leasing fees, re-key fees, repainting, or not to mention worries about the tenant paying or vacancy. They love the fact that the builder maintains the complete home. And with prices from barely $100,000 in Texas and rent payments from around $1,000 to $1,200 per month, this investment makes a lot of sense.
What is the leaseback exit strategy?
In essence, an easy sale. Many builders will actually forward the names of interested buyers to you at the end of their lease. You can even make a buyer of the tenant. Not interested in selling? No problem: the builder leaves you with a fully occupied home at the end if his lease obligation. If you are a long term buy and hold investor then you should consider buying a leaseback home for an easy entry into a foreign market.
How do lease terms vary?
Most builders will only sign a renewable one year lease, but there are some recently that have signed a lease for two years. Some will also pay other miscellaneous expenses like taxes and home owner Association fees. Suffice it to say that some builders pay less rent and more expenses and some pay more expenses and less rent.
How do I find builder leasebacks? Leasebacks are working well in growing real estate markets like Texas. Be careful of states that have troubled real estate economies trying to “pay” you to take them off their hands. My motto is, “If it’s easy to buy, it’s probably hard to sell.” In good markets like Texas and some other States, it is extremely difficult to do on your own. At the end of the day there are usually only a handful of these opportunities available as leasebacks on the open market every year in most states. They will require some research, time and luck to find. You need to establish a relationship with someone who has the builder network in order to get the leasebacks.
Overall, the builder leaseback program should likely be part of any good real estate investment portfolio, especially if you plan on investing in another state or country. The key is that you have a secure, measured risk with stable income for a time period, more than almost any other real estate investment. After the builder’s lease is over, you have an exit strategy pre-planned for rental or resale. This type of investment can have very strong cash-on-cash returns. There are some leaseback programs out there in the 15 to 18% range, as well. Add a little appreciation, low expenses and the tax benefits and your total return could be staggering.
Ron Black is a Professional Real Estate Investor and President, Texas Investor Homes, TexasInvestorHomes.com [email protected]
For more information on investing in the Lone Star state, pick up a copy of our September issue, on newsstands until September 12.
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