Buying From Landlords
- Grant Wiese
- Mar 31
- 4 min read
SW Financial Literacy
Buying from Landlords
Consider all the options.
Farmer Scenario
Landlord A is happy renting to the farmer. They have a great relationship going back a number of years. While this landlord doesn’t live in the area anymore, they have fond memories of growing up on the farm.
This ground is near a town and will eventually be in the path of progress. Landlord A can delay a sale and doesn’t want to leave their good tenant in a bad spot by pulling the ground away from them and selling to the city or a construction company. The money and getting the best return aren’t priorities for Landlord A.
Landlord B is also very happy working with this farmer (isn’t it weird that good relationships can exist between landlord/tenant?). They would like to get the best return possible if they sell the ground to the farmer but again aren’t in a hurry to get anything done. Landlord B has no issue continuing to rent the ground for as long as possible. This is a larger property that Landlord A has.
As a farmer, what do you do?
Usually when farmers have a good landlord that will stick with them it is advantageous to continue renting as long as possible. That way you continue generating some income off the ground and you can use leverage to bring new acres into the operation by buying ground you aren’t already farming.
If you did want to move forward with buying one or both of the properties, how would you go about doing it? This is a valuable exercise to train yourself on finding new ways to acquire ground.
The Options
Buying Option #1. Landlord A will give you a strong deal. You can buy this ground, then flip the property in 5 years to a business owner or the city, generating a 40% return on your money. You then 1031 those proceeds into buying out Landlord B.
Buying Option #2. You own a farm several counties away that is rented for decent return but the tenant can be difficult to work with. Since you have had this property for 10 years and steadily grown its equity, you could 1031 that property to buyout Landlord A or B, reducing your debt service and keeping cash flow strong.
Buying Option #3. You buyout Landlord A with the equity from selling the farm a few counties away to preserve your working capital but in the process tighten your cash flow considerably. Continue renting from Landlord B since the tight cash flow doesn’t justify buying this ground at full price.
Buying Option #4. Since Landlord B has a larger land base which is crucial to maintaining the operation for the size and scope of your equipment line, you choose to buyout this landlord first. Landlord B had the ground appraised at the top of market values but isn’t in a rush to get the ground sold. You come to the following agreement: You will buy the property at the appraised value and sign the contract today, but the purchase (and transfer of deed) will take place in 5 years. In the meantime, you will continue to rent the ground and a portion of the rent proceeds will go towards the buying of the farm. When the 5 years are up, you have paid for 10% of the purchase price through your rent to own agreement. Then, you continue with a seller carry finance for 5 years with a balloon at 3% interest. For another 5 years you continue to pay Landlord B, this time as loan payments instead of rent payments. After these 5 years are up (10 years after the initial agreement), there is a balloon on the seller carry allowing you to refinance at a bank and payoff Landlord B. They continue receiving payments for 10 years, get the full purchase price they asked for, and received interest for the seller carry. You get the ground at a slight discount through the rent-to-own structure and take advantage of a low interest rate during the seller carry years.
Buying Option #5. Combine options #3 & #4. This can be accomplished because you have sufficient equity to finance Option #3 with a bank while Option #4 is using Landlord B on rent-to-own and seller carry agreements.
Buying Option #6. Combine options #1 & #4. After 5 years when you flip the ground from Landlord A and Landlord B is ready to begin their seller carry, you use the profits from the sale from option #1 to significantly paydown option #4 while still using the seller carry at 3%. This frees up cash flow without using cash and puts you in a great position to grow again immediately.
Option #7. Keep renting the ground and look to buy elsewhere.
Which would you choose? What didn't we consider? Let me know in the comments.
No wrong answers here. Can you see why this is a valuable brainstorming exercise?
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Have a great week!
Grant
