ok, so i am a little confused on this raising capital for a down payment, maybe someone can explain it to me how it works. There is a 100 unit apartment complex for 6 million. I would have to put down 25%, so I would need 1.5 million when i get a loan. So my question is, how are you guys structuring theses deals when you raise the 1.5 million from other people. Do you raise the whole amount (1.5) and take a percentage of ownership? what percentage if im not using any of my own money? Or are these people giving you money as a loan and just paying them back a % at a whatever length amortization? (so more or less you are 100% financing this deal). Or am i totally off and there are other ways of doing this? I appreciate the input, as i would like to raise capital asap. Thank you.
Chris
@Chris D., in addition to the down payment, make sure you raise money for the tax and insurance reserves, working capital, lender fee, mortgage broker fee, application fee, attorney fees, securities attorney, title work, survey, appraisal, physical inspection, environmental study, etc.
As a rule of thumb, you can estimate the above around 3% of the purchase price.
Also, as @Kit England mentioned, you will need to raise funds for cap ex. Usually these funds are held in escrow by the lender. As you complete the scheduled work you submit the invoices and cancelled checks to the lender, sometimes the lender will come inspect to ensure the work was actually done, once approved the funds are released from escrow.
Make sure of course you raise funds for your paycheck, the organizational or due diligence fee or a/k/a acquisition fee. Generally this is 3 to 5% of the purchase price. I charge 3% for my deals.
I am buying a 240 unit deal and closing 4/7/16 for $9.4 million and it appraised for $9.9 million and raising $3 million. This will be my 4th large syndication deal.
I can't stress this enough, make sure you have more investors than you think you will need as people's situations change from when you present the opportunity to when they actually fund escrow.
Good luck!!
Wow, great information from everybody, i appreciate the help. @Brian Adams how did/do you find these people to give you money, and what is the average amount do you see most investors giving you? Also, what is a fair amount of ownership % do most of your investors feel comfortable with as well taking a salary?
Chris, the broad answer to your question about how do you find money is that private capital is everywhere.
You can raise funds from family, friends, business associates, CPA, attorney, doctor, here on BP, REIA groups, meetups, family offices, etc.
Most people won't tell you that they have a $100k to invest so you will need to develop a plan or a process to find them and convert them into funding your deals. Investors obviously invest in a deal, but more importantly the investor is really investing in you as the operator of the deal.
There are more parts to this process, but high level, to attract investors you need to share your story - how you got started, track record, lay expectations on how the investors will benefit, follow-up, follow-up and forgot to mention follow-up.
You aren't asking the investor for $20, but a significant amount of money. So you must follow-up often and create a relationship.
The fundamental piece of your process is at the end of the day you need to establish trust with the investor and clearly communicate how the investor will benefit by working with you vs. your competition.
The average investor amount and ownership allocations will vary depending on each deal, your experience and track-record and what you can negotiate.
There are a lot of ways to answer your post since this is an area where you can be very creative on how you raise the needed funds.
A lot of the loans I fund involve syndicated funds to close the loan. Typically, the borrower(s) raise the amount needed for the down payment, reserves, any CAPEX, and in some cases, funds to cover lack of sponsor liquidity. Obviously, the more you raise the more you need to be sure about the NOI and returns you an give back.
I've had loans where there were over 100 investors with each throwing in a small amount (10-30K) and loans where there were only a few investors. I've found the borrowers I work with tend to prefer more investors who will take a small(er) ownership/equity stake as they are easier to manage than a couple larger investors who tend to want to have some say. Your operating agreement will set the tone as to what role the investors have, but it's just human nature to want to look after your investment so the more a person has invested the more they're going to be looking over your shoulder.
Normally, the amount of percentage of equity the investor receives is in proportion to the amount invested, but this is one area where you can be creative. You do need to be careful about the percentage of ownership you give though since the lender may require an investor become a sponsor if their ownership percentage is 19% or higher and that's usually problematic, but it can also help if an investor is willing to become a guarantor for a higher equity stake and they have good liquidity/net worth to help secure the loan.
That said, some lenders will require you to inject some funds of your own, but not all. As I stated, I've closed loans where the borrower injected no funds and didn't have the needed liquidity so he raised additional capital to offset that requirement which the lender held. There are also lenders who are flexible on the sponsor liquidity and net worth requirements. The general rule of thumb is that the sponsor(s) have 10% of the loan amount liquid and a net worth equal to the loan amount, but not all.
Working with the right lender can really make or break a deal like this if you don't meet the "general" rule of thumb. I closed a 11MM purchase in Jan where the borrower only had 300k in liquidity and they didn't require any additional capital be raised so working with right lender can have a huge impact on the funds needed to close or even getting you to the closing table at all.
Hi Chris
Never ask people for money. Offer them an opportunity to generate a return. Once you do your first deal and are successful, then you will see people start "giving" you money. The key is to start and build a track record. Does not matter the size.
Gino