What's first... the deal or the funding?

Question

My partner and I are interested in buying an apartment with 100-200 units. We'd like to find a B class property with some value-play that we can re-position and resell within 3 years. Would you have investors and lenders waiting on the sidelines ready to fund a deal that fit those parameters, or would you work with a real estate brokers to find a deal first?

Matt Rodak · Answer

@Michael Yin

Building relationships with investors takes time. Unless you have a really deep Rolodex of investors who have experience investing in these types of deals and with you, you should start getting soft commitments before you have the deal.

One thing we did for our start-up was to put together a hypothetical deal. We developed an investor deck, financials, business plan, etc. as if the deal was real. We shopped this deal around to some investors and said, "If we deliver a like-kind deal, will you invest?"

If yes, you can have them sign a non-binding letter of intent with how much they are willing to commit. Add them to a mailing list and provide periodic updates of your progress to keep them in the loop.

A big benefit of doing this is it allows you to get feedback from your investors as to what they are interested in, what they like, what they don't like, etc. This provides info you can use later when you have the deal and need to close them. This is also a valuable exercise for those that say "no" as you may be able to overcome those objectives as you are negotiating the deal.

Also, your hypothetical deal package can be reused once you have the deal by swapping out the "fake" data with the real thing.

The only caution I will make is that you don't want to do this too far in advance of your ability to actually deliver. Investors may lose interest if it takes you too long to deliver.

Good luck!

Account Closed · Answer

@Michael Yin

If you focus on equity investors and debt providers BEFORE you have a deal, they're going to be wondering why you are wasting their time when you don't have a deal to present... so I would (1) focus on locating/negotiating a good deal (good deals are made, not found), while simultaneously (2) networking and building relationships with possible equity investors.  Obtaining debt will be much less difficult, assuming you have a truly good deal.

I would draft a "investment criteria" sheet and send it out to all the major commercial brokers in the market you're focused on.  Also, personally meet (physically) with each of them (this tells them you're serious).

EVERYTHING RESTS on (1) the quality of the DEAL and (2) the quality of your REPUTATION and your ability to get deals done.  If you're good, over time, (2) will bring you (1).

Good luck!

Michael Yin · Answer

@Matt Rodak We'd started going down the road of putting together a hypothetical deal. We went to look at some properties we could use as the subject (not listed, just properties close by) and visited surrounding comps, but then got bogged down on how to show rent rolls and other financials. We also wanted to pick a property that hadn't already been renovated, but we're not finding any around us. Would you have an example of the hypothetical deal package (including what you mentioned before - investor deck, financials, business plan) that you'd be willing to share?

Here's the outline we we're going to use... what would you leave out or add?

• Executive Summary: Include 1 or 2 page summary description about the deal and your plan. Highlight all the strong points of the property and the deal.
• Mission Statement: In a few paragraphs that succinctly state your purpose
• Background/Resume: Present information about yourself and your experience
• Financial Statement: List your assets, liabilities, and net worth
• Site Location: Include list of benefits, maps, and proximity to shopping and schools
• Demographics: Present information about the people living in the area (income, education, etc)
• Competitor Analysis: Determine who your competitors are and the present average rents and sales comparisons
• Marketing Strategy: Define your target market (tenants, buyers, etc)
• Financial Analysis: Include all the relevant financial data: last two years of financial statements for the propertycurrent year-to-date profit and loss statementcurrent rent rolland pro forma operating statementsfive-year profit and loss projections
• last two years of financial statements for the property
• current year-to-date profit and loss statement
• current rent roll
• and pro forma operating statements
• five-year profit and loss projections
• Improvements: Define capital improvements to be made to the property
• Repositioning Plan: Cover the following items as needed Explain how you plan to operate the property Plan for replacing the property management teamPlan for developing a new marketing planPlan to implement a resident retention programPlan for changing the reputation of the propertyPlan for building a sense of communityPlan for making changes to the current resident basePlan for acquiring your target rentersPlan for resolving any current issues
• Explain how you plan to operate the property
• Plan for replacing the property management team
• Plan for developing a new marketing plan
• Plan to implement a resident retention program
• Plan for changing the reputation of the property
• Plan for building a sense of community
• Plan for making changes to the current resident base
• Plan for acquiring your target renters
• Plan for resolving any current issues
• Give summary of when and how the property will reach break-even, and how you plan on paying the lender/investor

• last two years of financial statements for the property
• current year-to-date profit and loss statement
• current rent roll
• and pro forma operating statements
• five-year profit and loss projections

• Explain how you plan to operate the property
• Plan for replacing the property management team
• Plan for developing a new marketing plan
• Plan to implement a resident retention program
• Plan for changing the reputation of the property
• Plan for building a sense of community
• Plan for making changes to the current resident base
• Plan for acquiring your target renters
• Plan for resolving any current issues

• Plan for replacing the property management team
• Plan for developing a new marketing plan
• Plan to implement a resident retention program
• Plan for changing the reputation of the property
• Plan for building a sense of community
• Plan for making changes to the current resident base
• Plan for acquiring your target renters
• Plan for resolving any current issues

• property management company
• attorney & title company
• contractors

• when the due diligence period expires
• the expiration of the financing contingency
• closing date

• photos of the property
• aerial maps
• tax returns
• sample floor plans, and the like

Matt Rodak · Answer

@Michael Yin

I'm not sure my investor deck would work for you as we were focused on residential fix and flip properties. That said, your list is very comprehensive and an investor will want to know YOU are thinking about all of these things. Depending on the investor, they likely have less of an appetite to thoroughly go through all the diligence you will need to do.

Another way to think about it is having an understanding of where the investor is at in the "sales funnel". There are 6 stages:

Awareness - They are now aware of what you are doing.

Consideration - They are considering whether what you are offering is worth investing in.

Preference - They prefer your investment opportunity to others.

Purchase - You got the order!

Loyalty - They will invest in future deals with a much shorter conversion cycle

Advocacy - They are telling all of their friends about you.

Depending on where your investor is at, the more info you will need to provide them. At the Awareness Stage (which is where you seem to be), you can get away with having a lot less detail. Give them the high level mission statement, investment thesis, resumes, ideal property, ideal tenant, your diligence process, etc. You're selling yourself at this point as much as the deal.

What will happen is that during the meeting you will get questions you don't have answers to. This is what you want. You simply say "we're still too early in the process of finding a property that meets our thesis, but as soon as we do, I'll be happy to provide that info to you." At the end of your Awareness meeting, get permission to follow up once you have more details to answer their questions.

You achieve a few things this way:

1. You move them from Awareness to Consideration, giving you permission to follow up with them. Or they tell you that your thesis doesn't align with theirs and you can move on.

2. You are armed with unanswered questions that you need to find answers to. They asked these questions because that's what's most important to them. If you get similar questions from multiple investors then you can prioritize what things you need to figure out first.

It you look at it as a process - each meeting is to move them further down the funnel towards Loyalty and Advocacy - it will become apparent what you need to figure out in order to move them. You'll likely end up developing all of the bullet items you listed above but you don't need it all to start having conversations.

The key is to remember its not about you. Its about them. Where are they at in their decision making process? How can you help them go from where they are to where you want them to be? You will never be able to go from Awareness to Purchase so there is no need to develop all of the material to do so right out of the gates. Focus on developing what you need to move the needle.

If you've not had an investor meeting before, role play with someone. Get them to act as an investor and pitch to them. See what they ask. What gaps might make sense to fill before your first meeting. This can be awkward but its totally worth it.  Happy to be a sounding board for you if you'd like.

Good luck!

Account Closed · Answer

@Michael Yin you are interpreting what @Steve Olafson said correctly.  In the larger multifamily space, sellers rely primarily on brokers to vet potential buyers.  In a competitive market like we are in today, brokers will ask to see proof of funds, transaction history, industry references, etc if they don't already know your firm.

Unless you have $10 million liquid in the bank and it's a deal that no one else is chasing, you are going to have to work pretty hard to convince a broker/seller that you can take down the deal.  If you don't have the reputation and track record, be assured at a bare minimum, you will need to show you already have the equity raised and have a lender willing to make a loan to you.

Account Closed · Answer

@Michael Yin

Your list is too long. I would get access to another experienced investors presentation and copy the format.  Most equity investors make decisions on (1) the reputation and experience of the sponsor (YOU) and (2) the return you're claiming you can generate (the DEAL).  You don't want to waste their time with a 30 page summary, when you can provide the essentials in less than 10 pages.  Cover: Sponsor, deal description, including analysts, market, terms.

Steve Olafson · Answer

You will need to show that you can take the deal down in the first place or the seller will not consider your offer.  Unless they know you are a deal maker, they will likely ask for bank statements to show that you have the money to close.

If you want to see the best deals, you need to prove that you can close transactions without problems.  So I would say that you should have confidence that the lender is ready to roll with you as well.

Michael Yin · Answer

Account Closed Thanks for the feedback. Based on what everyone else is saying, we'll be moving in the direction of seeking out investors and lenders; then the deals. Thanks!

Michael Yin · Answer

Account Closed when I was asking what you'd add the the list of items you'd want to see when underwriting a deal, I meant the list of items I posted yesterday (that I would put together when talking to investors and lenders about a specific deal). Thanks for the feedback.

Michael Yin · Answer

Account Closed as a capital investor, is there anything you'd add to the list/outline I posted above that you'd want to see when underwriting a deal?

Also, is there a particular format that's commonly used for a "investment criteria" sheet, or is it sufficient to state it like this:

• Class: B or C apartment community (not already renovated)
• Number of units: 100+
• Cap rate: around 10% or higher
• Has one or more “Value-Plays”
• No structural problems
• No significant environmental issues

What's first... the deal or the funding?

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