There are some very ingenious ways to get your multifamily property deals done. Three of the lesser known avenues for obtaining private funds are the wrap around mortgage, splitting off the property and the option. Here we will examine how each of these options work.
Wrap Around Mortgage: this is the scenario where you will take over someone else’s note. Let’s say that there is a house that you want to buy and it has a first mortgage on it. They are actually going to be the lender. You will pay the seller. Your note is written with them and their note wraps around the existing note.
For example, you buy the house for $100,000. They agree to no down payment. Their mortgage is $80,000. Your mortgage to them is for $100,000. They get payments based on $100,000 and the mortgage is wrapped around the $80,000 mortgage. Let’s say their principle interest payment before was $800.
Your principle interest payment is $1,000. I’m paying them $1,000 and they have to pay $800 so they are making $200 per month in passive income because of the wrap around of their mortgage. A wrap around mortgage means that your loan is of a higher amount with different payment terms.
Splitting Off the Property: let’s say you own a 10-unit apartment building that you bought on 3 1/2 acres. The building sits on one acre and the other 2 1/2 acres is raw land. You put it under contract and you have 60 days to close. You can then find a buyer for the land and get that under contract and have them bring the money at closing. You could use the money for the land to be the down payment on the apartment building and it is split right there at the table. You are splitting the property and pre-selling it before you go to closing.
Option: you can get an option on a property. You could lease with a lease option or you could do a joint venture turnaround. Another twist on this is that you will not be a 50/50 partner but instead will come in and improve the property. It is worth $900,000 today and you will drive it up to $1.2 million or above.
You will do that at no charge but you want the option to buy the property at $1.2 million. The owner is getting everything up to a $300,000 increase and you get everything above the $1.2 million. This is another form of a joint venture turnaround. You have the option rather than an equity partner.
Wrap around mortgages, splitting the property and options are just three more great ways to structure a multifamily property deal. The more you look at putting together a multifamily property deal, the more you realize that the options that are available to you allow you great flexibility.