Financing for developing a RE Investment Company

[Josh Gesler]

First of all, this is an amazing forum. I've been on other real estate forums, but I just discovered this one recently and it is far more helpful. Anyways, on to my post.

I've got a hypothetical situation for you. Oddly enough, it happens to practically mirror my own situation but don't let that get in the way. :-)

Let's say there is this guy. Let's also say that he is in his late twenties, smart, good looking, and tech savy. (Sorry ladies, he's married.) He has been researching real estate investing for over five years but has never "taken the plunge." Recently the economy got all wobbly and creates an amazing environment for investing in real estate. It seems that there are many places in the country where you can buy property for far less than it's worth, rent it out, and make a decent profit. In fact, you don't even have to hunt anymore. There are lists upon lists of property like this. Seeing that now is the time to strike, our hypothetical guy, let's call him J, decides to take action.

Now J isn't the kind of guy to dabble in things. When he decides to do something, he pushes ahead full force and does it two steps above what the "average guy" is doing. J doesn't want to just buy a couple of properties and add to his income. He wants to replace his income and then continue to build an "empire" or sorts. The master plan is to acquire properties as quickly as possible. His initial goal is to replace his income plus enough to afford his own health insurance. Let's say that's around 60K. It is now possible, if not easy, to buy property with "no money down" that will more than pay for it's self. This is doing it the right way, not over leveraging yourself into a hole if something bad happens. Seeing that he can buy properties that provide $100/month per door positive cash flow after a 30 year mortgage and using the 50% rule for expenses, he figures he needs 50 doors. (60,000 / 12 = 5000 / 100 = 50 I told you he was smart.) This is obviously WAY over the 4 property limit used by most lenders. Even if they raise it in the next couple of weeks, we are still going to be a little short. While developing his business plan he can see that he is going to be stopped cold before he even gets started. Obviously some other form of financing is going to be required. Other options would be to buy apartments, self-storage, lemonade stands, etc. These are considered commercial real estate and again some other financing will be needed.

The plan is to setup a corporation or LLC (still talking to the accountant about which) and have it own the properties in sub-LLCs. This should allow for the option of business lines of credit and commercial loans. There are a couple of things to complicate the situation. J's income to debt ratio is a bit higher than 50%. A LOT higher. Hypothetically speaking, let's say this is because of a divorce a couple of years ago that left his finances a bit upside down. Credit score is ok, but the rest doesn't look too good.

So here is where I need your help. Err, I mean J, our hypothetical guy, needs your help. I can develop a business plan that shows how this whole thing will make money. The problem is that normal mortgages aren't going to work. So what would you suggest? Commercial loans? Private money? Checking coin returns on payphones until I collect enough quarters? Remember I'm trying to do this with no money down. This isn't a problem from a cash-flow standpoint or even an equity standpoint, the problem is with then lenders wanting skin in the game. I don't have any skin to spare at the moment. There has to be a way around this. There are some brilliant minds here. J is counting on you!!!

Thanks,

Josh Gesler