Options on raising capital?

[John Guy]

Greetings!

First off, extremely grateful for the BP community. A full year of reading BP material and listening to podcasts has put me in an incredible state of paralysis analysis and I need some guidance on my next action-step. I am currently 25 years old and manage a rental agency with 63 vacation rentals in Southern Maine. I have managed the agency for about two years and I am the only employee - I oversee all operations and the owners are completely hands off. I am on a $42k/yr base salary, with a 10% business maintenance bonus and a 40% growth bonus. I'm projected to earn roughly $75k gross in 2022. 

My girlfriend and I have two children and we rent a beautiful farmhouse on 92 acres in Maine. Our rent is high, but achievable through some creative use of the property (landlord approved - they're super cool). I want to purchase investment rental property, but my girlfriend is not willing to down-grade to a multi-family and house-hack. My morals won't let me falsify residency just to have a 3.5% down payment on an FHA loan, but that's the only feasible deposit amount that I'd be able to swing at this point in my life. Borrowing from family members isn't exactly an option and I don't have a strong line of credit (I made some big mistakes when I was younger and I have been slowly rebuilding, currently a 610)

My question is this: 
It feels like I'm grid-blocked from entering the world of investing. What is the most logical way to raise enough capital to purchase without having to utilize my personal credit and without winning the lottery? Seller finance? Private Money?

I appreciate ANY and ALL input that you guys have to offer. 

John

[Alex Breshears]

Hi John!

This is such a great question and gets asked frequently.  There are a few different options that may work depending on your needs, current goals, and skill set.

First, I want to be clear that real estate investing isn't just buying rentals. As you have probably learned doing all the research you have in BiggerPockets world. There are a ton of ways to invest, and some have nothing to do with having rentals. I would suggest if you haven't already done so, really put pen to paper and think about your goals and where you want to go. Then find an investing strategy that works for your family.  As an example, I do private lending because I am a military spouse that has moved 19 times in 21 years.  I hated being a long distance landlord (or any landlord) and the last thing I want to spend my time doing is talking to contractors. Want to make me miserable? Have me choose out flooring and paint for a few days. No thank you.  So obviously, fixing and flipping it out for me (unless my spouse has some interior decorating skill I have yet to see in 20+ years), and being a landlord is in the same category of punishment as a root canal. When I looked at my lifestyle, my skill set, and what I genuinely enjoy doing, I found private lending. I needed geographical freedom, I wanted time freedom, and I didn't want to babysit adults ever again in my life.

Now onto your question about capital.  First, you need to be clear that this is investment property. You are not buying it to move into it someday. The financing and strategies I will outline are under the assumption this is purely an investment property purchase. That makes a huge difference.

Option #1 - find a mentor/partner to do a deal with. They can bring the capital and you can bring the sweat equity to the deal. Document everything, think about roles and responsibilities, and learn the ropes.

Option #2 - Create an LLC with a small group of friends/family members to then purchase the LLC. Pooling capital from a group of active investors in this manner will allow the capital required and potentially if you got a nonrecourse DSCR loan it wouldn't affect your personal credit. With this option, everyone must be considered an active participant. That doesn't mean everyone needs to swing a hammer or call the shots, but it does mean they need to have a say in something related to the project. This option can have a lot of moving parts in the negotiations and figuring out who does what, but still doable.

Option #3 - Do a master lease option with another investor.  With this option you are essentially renting the property with the option to purchase it at a future date for a set price. You are then the "owner" for the cash flow and tenant issues for the property. No qualifications for financing, but will generally want something down as part of the deal, but might be less of a down payment than traditional financing.

Option #4 - Find a subject to deal, financing is already in place, may still have the cash requirement upfront to get the seller to walk away or catch up their mortgage. But, no traditional financing qualification needed. Will have the risk of the mortgage being thrown into default because ownership of the property changed without the mortgage being paid off.

Option#5 - I would consider this an advanced strategy, and only to be undertaken by someone with experience in real estate, but wanted to let you know it is out there. You can raise capital from passive investors with an SEC exemption of the JOBS Act. This would be something like a Title III Crowdfunding or Regulation 506b or 506c.  Again, this can be cost intensive to set up, there is a strong fiduciary responsibility to take on.  You could also potentially participate in something like this as a passive investor or a GP team looking for property management in your local market.

Hope that helps!