How do I pay the down payment with OPM?

Question

I'm looking to make an offer on an apartment building. I don't have the money for a down payment ($900k). Where would I go to find investors? The return would be 12%. I tried calling a hard money lender, who told me that I would need "skin in the game" - at least 20%, which I can't do at this point.

I would also need a sponsor for the credit (700+ FICO). Thank you!

Brian Burke · Answer

@Sasha Friedman I admire your "dream big" approach!  It's great to think about pushing your comfort zone. Be careful, however, about recognizing the distinction between what is technically possible versus practically feasible.

Multifamily is a complex game that most newcomers underestimate, oftentimes to their own peril.  Operational experience is critical, and while aligning yourself with an experienced property manager can fill some of that gap, you are at a serious disadvantage because your oversight of that manager will fall short without practical experience of your own.

Raising money from investors at this level requires that you have a rich family who blindly believes in you and gives you the money solely for that reason, or requires that you have a track record, in which case you can attract capital by virtue of your prior successes.

Additional thoughts to consider:  you will need to raise more than the down payment. Closing costs, the cost of securities counsel, formation costs, capital reserves, the first year's insurance premium among other things will increase the capital required above the down payment.

Your lender will likely be looking at your experience as a factor of their underwriting.  They will likely also require that you have a specific net worth and liquid assets of your own.

If this all sounds daunting, there is a path to success.  Start small and grow organically. Buy houses, then duplexes, quads, then grow from there. Perhaps your first raise is $9K from friends and family.  Then you raise $90K from your rotary group.  Work your way up from there. There are no shortcuts, unless you're selling courses on late night TV.

Jeff Greenberg · Answer

@Sasha Friedmancongrats on your high goals.  With that said what is your experience level that would insure the investors that they would get their money back. What do you know about the SEC regulations regarding raising funds?  You have made the first major mistake by announcing on a public forum that you wanted to raise money. Essentially you just disqualified everyone reading this discussion from being able to invest if they were interested.

Now is the 900k the purchase price, the down, or the full raise?  In any case if you have never raised funds, is a big raise for your first time out of the gate.  There are other discussions on bp about the proper way to raise opm. Just make sure what you do is within the rules.

Sasha Friedman · Answer

Thank you all for your thoughtful responses. For those who asked what I'm bringing to the table, it is my time and my knowledge. I found the deal, analyzed the deal, made sure it was cashflowing and stable, found comps, etc. Yes, I will be hiring a management company. If you are a hard money lender and are interested in a 12% return on a 2nd, please contact me with your terms, limits, etc. Thank you.

Ronald Perich · Answer

@Sasha FriedmanI remember @Joe Fairlessdiscussing how he raised money for a turnaround project. His advice? Make a list of every group and association you belong to. Friends, Family, Church, softball team, volunteer organizations, vendors who know you personally, etc. Write down everyone you know into each of these groups. Have you presentation ready for them and get at least one from each group to sign up. Then use their name with others in the group to gain credibility.

If you don't have a track record at this level, you might be able to remove risk anxiety by bringing in a property manager as part of this deal. Get them all lined up and on board with the plan. They will hep you with the credibility part.

Good luck!

Jeff Greenberg · Answer

@Sasha FriedmanI am with you on the no money out of your pocket deals, but this situation has several issues.  1) As @Brian Burkestated there is more to closing then just a down payment.  If you find a HML that will take a second and cover all costs to 100 % ltv of the purchase, I am sure there are many investors here that would like to get to know them.  2) you also would need to find a lender that would allow a second. 3) "what I'm bringing to the table, it is my time and my knowledge."  This is a piece that we have not heard anything about.  Can we also add the term experience or track record?

It is good to ask the questions on these forums, but it is the lack of information that indicates to me that you are new at this.  I never did get an answer as to whether or not the 900k is the down or all closing costs.  A 900k raise for someone that is new is quite a feat unless you have a lot of high net worth friends or family.  Since your first questions was how do you find investors, I guess that it is not the case.

Victoria Winters · Answer

@Sasha Friedman

Hi Sasha.  It is great that you posted your situation here on BP.  Your goal to get involved in real estate is a good one.  Real estate investing can be done effectively with leverage of other peoples's money, but in order to attract the players, you must bring something to the table also.  Investment requires an investor to first give in order to receive a return. It is not logical to ask other people to put their money into a deal when you are not first contributing some of your own money to your own deal.

Many people new to investing or thinking of getting started believe there is a way to get in for "Free". There are no free rides in life but there are easier rides than others. Earning money is not difficult. it is through earning money that buys financial freedom.  In other words, put some of your own money to work for you.

Kevin Siedlecki · Answer

@Sasha Friedman

I love the ambition!  You might consider changing your approach.  Instead of presenting your needs to people, present what you can offer them.  I think Brandon said on then AskBP Podcast the other day, as an investor, we should never be asking for money.  We should be offering opportunities that other people want to put money into.  Why should investors use you to get this deal if you need someone else to guarantee the loan and someone else to put the money down?  What do you offer?  Once you have the answers to those questions, lead with that.  Of course, there are still regulations to consider, as other posters have mentioned.  It's going to be hard to raise $900k from friends and family!

Mark Elliott · Answer

all good advice, sasha. but don;t give up. i know the california market is rediculously high, but you can still do it. you need to start small and work your way up. no one hits a home run their first time at bat. look for other places that are a little cheaper and work up from there. good luck

Dee W. · Answer

Due to the changes in how one can present opportunities to raise equity or debt through private placement offerings, depending on "who" you target you can solicit funds through solicitations (including online forums such as bigger pockets and social media).  I would advise you to conduct your own due diligence before diving off into the deep end first however.  You definitely should have experience or have the intention of hiring a management team that has experience.  Multifamily is not for the faint of heart and is definitely not "childs play." But back to subject at hand, here is a little information regarding raising capital through private placement that I pulled from my own stash:

Rule	506(b)	offerings,	which	cannot	use	general	solicitation but	in	which	non-accredited	 investors	can participate	so	long	as	they	are	provided	with	extensive	information	about	the	 issuer	of	the	securities,	usually	in	the	form	of	a	private	placement	memorandum	or	PPM;	and • Rule	506(c)	offerings,	which	can	use	general	solicitation,	but	must	be	sold	to	accredited	 investors	only,	in	which	the	market	will	let	investors	dictate	the	type	of	information	that	they	 need	in	order	to	make informed	investment	decisions.

Hope this helps.....

Victoria Winters · Answer

@Sasha Friedman

The value of your time and knowledge is a marketable product. Under the scenario described in your initial post, it is evident that the message of what you have to offer is not reaching your intended audience and/or is not presented in such a way as to attract your ideal client.  Please feel free to message me if you would like to discuss this further.

How do I pay the down payment with OPM?

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