Build to Suit
(An excerpt from 69
Ways To Make Money In Real Estate)
By Steve Gillman - 2005
With a build-to-suit project, you can generate good cash flow
from reliable tenants. Be ready for this one though. Your land
can sit empty for a long time.
The basic concept behind a build-to-suit deal is that you
invest only in the land until you find a long-term tenant. Then
you build whatever the tenant needs, after he signs a lease that
assures you you'll have positive cash flow. The tenant is happy,
you are happy, and the bank is ready to finance the construction
as soon as you show them that ten-year lease.
These things can take time. You have probably seen a vacant
lot with a sign that says "Will Build To Suit" or something
similar. And you have probably seen the same sign on the same
empty lot six months or even a year later. This is obviously
not a get rich quick plan.
The good news? It can be relatively inexpensive to hold onto
a vacant lot while you are waiting for that perfect tenant to
build for. If you paid cash for the lot to begin with, you have
only the cost of the property taxes and whatever advertising
you choose to do. Besides, if the average rental has gone up
$50 while you are waiting, you can even make $6,000 extra from
that 120-month lease.
A Build to Suit Example
Suppose you bought a small lot in a commercially-zoned area.
There have been several new buildings put up along the same street
in the last year or two, housing businesses ranging from a drugstore
to a car-parts store. You paid $115,000 for the lot, and you
put up a sign saying "Will Build To Suit With Long Term
A few months later you meet a business owner with a successful
tanning salon on the other side of town. He wants one here as
well. You get together with him and a builder, and get a quote
for the building that he will need. Because the building will
be generic enough that it will be easily converted for use by
future tenants with other types of business, you agree to just
a five-year lease.
After checking out the owners references, and maybe even looking
at his books to see that he is doing well financially, you decide
that he would be an excellent tenant. Your total cost including
the land, the holding costs, the new building and everything
you can think of to include will be around $300,000. You talk
to your banker, who gives you pre-approval for a loan of $240,000,
contingent on a good lease showing sufficient income to cover
the debt service and other costs.
Your loan payment will be $1,600 per month. The tenant has
agreed to a triple-net lease, meaning he will pay for property
taxes, insurance and maintenance. That means you will essentially
have no expenses for five years except for the mortgage payment.
You negotiate a rental rate of $2,800 per month. This, along
with the other expenses paid by the tenant is slightly above
the going rates, but he will be assured of no rent increase during
the five years.
Once the place is built and the tenant is in there, you'll
have about $60,000 of your money invested, and net income of
about $14,000 per year. That's a cash-on-cash return of around
23%. With a triple-net lease, you will also have none of the
usual headaches of being a landlord.
You can see how these build-to-suit properties can be an attractive
If you found this useful or interesting, please share: