Financing Ideas Needed!

[Jacob Pruckner]

Hello All! A friend and I are interested in starting a partnership LLC to invest in Rental Properties. We are both new to real estate and looking for creative ways to finance our first couple of properties. We are looking to split start up capital 50-50, but are struggling to think of ways to find financing for our first property due to the whole "no conventional loans for LLCs" and the "due at sale clause" fears for transferring to our LLC. So I hope some folks maybe have experience with finding financing for a Partnership and any other tips and tricks for how to get started would be greatly appreciated. Thank you all! Jake

[Bill Gulley]

Well Jake, appears I should say thank you for your service.

Really, the very first issue boils down to basic economics, the 4 principles required for any economic transaction..Land, Labor, Capital and Entrepreneurship (or management).

Our laws of economics say that you will have a combination of at least 3 of these principles working together for a transaction, while one may be omitted, Land will always be one of the factors used.

At any time, you may require more of one of these factors than others, you might dig a ditch to make money, you'll expend a lot of labor, no capital other than the cost of your tools, land will be there and you'll follow directions of management or decide where to dig yourself. 

When one of these factors is missing or limited, other factors must be increased to make up for that limitation.

So, to your question, you lack capital, that means you'll need to apply more in the area of labor, entrepreneurship and the land will be a fixed component. Your only option then becomes more labor and relying on your knowledge.

You're new to real estate, so really, you have very little knowledge, the only thing left is labor. But the labor in this business will still be your knowledge of real estate!

Asking for creative ways increases the knowledge required, if we can't follow the norm or common practice to create the intended result, raising money, we'll need to think out of the box. But, before you can really think out of the box you must understand what is already in the box that can be used.

Now, the Catch 22, do get creative in financing (or apply entrepreneurship) you must understand financing, the alternatives and what will be required. To understand that you must first understand real estate because it's the land that is required to be purchased and financed.

So, you need to begin by understanding real estate,  then you can increase management skills knowing how real estate functions, it is not just the subject of the transaction but the asset to be added into the mix of these principles used to do business. The real estate is a tool to be used.

That brings us to some very basic questions most on BP can't answer, what makes real estate valuable? Why is it valuable? Is value seen by everyone to be the same or do others see a greater value in the same property? Can you apply labor, capital or entrepreneurship to increase the value as seen by others? 

When we talk about financing or raising capital, that value isn't just seen by buyers or sellers, we have investors or others with capital that will view the value of the property as well as the transactions associated with it, they are asking what do I get out of this?

At this point, you need to add more entrepreneurship, you'll have to be the brains behind the deal for you to profit, that's all you really have to sell, you have no land, can't really just add labor without the capital  and knowing what to do, so the value is very limited as to what you have to offer.

If you want money from other sources, lenders or investors, you'll need to show collateral, the return of their money first, this is going to be based on 2 things, the land and your ability to perform allowing others to profit. Be it a bank or a hard money lender or your best friend, they are only motivated to do business with you by the profit they can make. 

Understand too, investors or lenders don't really care about strategies real estate operators or investors might use, this strategy stuff is what gets attention by those wanting to make money, hey, let's flip this, let me wholesale this or I'll rent this out. Most all of this is simply a side show of your main event, entrepreneurship, that is what no money real estate operators have to bargain with. 

Most any prudent investor or lender will be considering what is in the box, they know what is customary and what they require. You must understand what they need and will consider as the norm before you can ever sell them on your abilities of being creative and increasing value in any transaction.

We have a lot of "pitch" men or women in real estate, we have the get rich gurus, deal makers and many will use a pitch or slogan like, "find the deal the money will come" but that's really not true. 1. real deals are made, not found and 2. they generally lack entrepreneurial skills as they follow a system or routine, they don't really understand what is in the box before they try to think out of it.

The fact is, you need to learn real estate, understand what it is that you have to offer, where value comes from for what you have to bargain with, show and demonstrate your knowledge, your entrepreneurial skills. Understand the economics of real estate, it is much different than with personal property. When you can do this, the money or capital will come.

Now, I or anyone might have told you get a money guy, partner up, go wholesale, work with seller financing or any wild and crazy idea, but you're really not ready to go there starting out, your question itself indicated a lack of entrepreneurship skills. Telling you to go partner won't do anything for you, if you lack knowledge what are you selling to a partner? 

Good luck, learn real estate before attempting to deal in real estate! ;)