Options on raising capital?

Question

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 · Answer

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!

Matthew Irish-Jones · Answer

If you are looking to raise Capital for the 25% down payment you will be 100% leveraged. This is not a great investing strategy. There is a reason banks want 25% down on investment properties. The best path for you is to take a long term view and not look to over leverage too quickly. That is a recipe for disaster of one thing goes wrong, or if there is a drastic change in the market. You are better off making a 5 year plan, saving enough for a real down payment, and getting your credit up to where it needs to be in the meantime. Sorry to be a wet blanket but... Slow and Steady and well Capitalized wins the race in Real Estate.

Jim Pellerin · Answer

@John Guy You don't need money to invest in real estate. You need to be resourceful and also use other people's money. Don't get hung up on "owning real estate" or "how many doors you have". Here are some short-term income earning strategies.1. Wholesaling - My #1 choice for you. Save the money for bigger opportunities.2. Fix and flips - Be a money partner - use the money you made from wholesaling3. Lease Options - I did over 100 of these. They don't require any of your own money. Focus on disgruntled landlords.4. Subject to's - I did a few of these. Harder to get because most people want to cash out to buy their next place.5. Seller financing - Vendor take back where the owner agrees to sell you title and hold back a mortgage for all or part. I did a few of these.6. Money Partners - Raise capital from friends, family and co-workers. I did a lot of these starting out becasue people know like and trust you. Once you get this under control, invest in private equity, syndications, joint ventures, etc to build wealth.

Nicholas L. · Answer

@John Guy I am with @Matthew Irish-Jones on this one. A lot of people say they have "analysis paralysis" when what they MEAN is "I am not in a strong enough financial position to invest yet." WAY different things. You're 25. Keep saving, keep building your credit, and start networking and going to REIAs. There just isn't any way to invest without any of your own funds, even with heavy borrowing.

Jeff S. · Answer

One answer could be right under your nose, @John Guy. As the sole employee of a rental agency does this mean you work for a single investor who owns the 63 units or are there many? No matter, these are the first real estate investors you might contact. Since you're good at helping them make money, you already have what I would presume is a trusting relationship with each and I bet any would be happy to speak to you, give you some advice, and possibly help you out. That is, you’ve unknowingly cultivated a built-in set of partners.If you’re able to find STR properties for your investors. You bring the deal; they bring the cash, and you do all the work. Similarly, they might be willing to partner or loan you money toward a small MFH at a high LTC (maybe 100%) or low-interest rate or any other non-typical private loan to help you. We loan money privately too and helped a good borrower buy his first house in many years after he lost everything in the great market crash. This was not charity, but the terms were well, well below our normal market rates. Coincidently, he made his girlfriend and two young girls very happy. It sounds like you live in a beautiful area, so I understand the dilemma your girlfriend has with moving. Investing in real estate doesn’t mean you still can’t rent. I know many other real estate investors who rent. This is because they want to, not because they have to. I suppose they enjoy a certain freedom. You should live where you want to live but invest where the numbers make sense. As a property manager, I’ll guess this is still nearby to you, but it doesn’t mean you're trapped. Ask some of the experts you work with what they would recommend. You could be surprised how they’re willing to help.

Deanna B. · Answer

There are so many ways to invest in Real Estate. You have to remember to look at it as a longer game than what you see on TV. Below are a few outside-of-the-box ideas for you to look into. There are a lot of grants available and programs offered through different mortgage companies that you may qualify for. Look into purchasing land that would be desirable to a developer for building on. If that land needs to have zoning changes you can gain value by working on that for the sale. Flipping contracts: You have to have a network of people to bring the deals you find to first. But the idea is to find the deals you would buy, and get it under contract with the ability to sell the contract. Another way to invest without a lot of capital is through tax liens. Research is the key to finding properties (look for ones without a mortgage ideally) and then learning the legal process that your state has for acquiring the property. Banks have lists of properties they own and want to sell or short sale, contacting them to get the information would open up more properties that are priced lower and/or off-market.

Chris Seveney · Answer

This right here^^^^^^

Zachary Inman · Answer

@John Guy Family and friends. Ask for referrals from people who know you, like you, and trust you.

Jim Pellerin · Answer

Start wholesaling