What is the best way to raise money for a multifamily deal?

Question

Hello BP,

I have read that for multi- family, sometimes it is better to find the money BEFORE you find the deal. I also know there are some SEC regulations when it comes to raising money for deals. In your experience, what is the best way to raise money for a good multi- family deal?

Brian Burke · Answer

@James Gleeson so you walk into Macy's and spend all day picking out all kinds of stuff.  New clothes for your wardrobe, new housewares, bedding, you name it.  After all that work and a whole day spent, you are finally ready to check out.  You walk up to the checkout counter and the cashier rings it all up.  Now, do you:

1. Take out your credit card and pay, knowing exactly what your credit limit is, or

2. Tell the clerk to hang onto the merchandise for you, because you'll be right back--you just have to go find the money to pay for the stuff.

The answer so obvious that it's even silly to ask.  Yet in a slightly different form this is one of the most common questions on BP--what comes first, the deal or the money?

When buying a multifamily property the broker or the seller will be asking you where your equity (down payment, closing costs, etc) is going to be coming from.  If they don't like your answer, they'll choose the best offer they have that is accompanied by an answer that they do like.

So to that, people ask "how do I get the money if I don't have a deal".  Asking that question is entirely missing the point--investors don't invest in deals, they invest in sponsors.  So you have to build your audience and show them why they should invest with YOU.  Once you've done that, when you eventually find a deal you are at step two, not step one.  Your audience can then evaluate the deal and if it as good as you say it is, they'll invest.

John Casmon · Answer

@James Gleeson Which comes first? The capital, but you don't need to have the funds in the bank account. You just need a STRONG sense of where the funds will come from and it doesn't hurt to have a backup. Sponsors are compensated for their efforts putting a deal together and managing all aspects of execution. Said differently, this is a job and their compensation is tied to their ability to execute.  Because of this you can't properly compare returns on a passive investment to earnings from performing a job. Whether or not it's worth it to be a sponsor depends on your goals, skills and experience.

Michael Le · Answer

A lot of multifamily apartments are bought via syndications and most syndications are structured under SEC Regulation D Rule 506(b), which requires that you have a pre-existing substantive relationship with your investors. So when people say to raise money before you have the deal, they mean you need to already have gone out to network and meet potential investors who are ready and willing to invest with you once you find a deal.

To get them ready and willing to invest with you, you will have to show them your background and track record and convince them you're someone they want to do business with for the next 3-7 years. More importantly than what returns they will get they will want to know if they invest with you if they will even just get their money back. You don't have a deal yet so you will have to sell yourself, which is for the best since the sponsor is more important than the actual deal. Even so you should be prepared to show them the type of deal you are looking for, the business plans you have for those deals, and your projected returns.

Michael Le · Answer

I'm invested passively in many deals. Does it help me with my own syndications? For sure. Is it necessary? No, it's not. It's just a way to get more educated and that's always helpful. Just like reading books or listening to podcasts or getting a mentor/coach or joining investment groups can all help but none of those are absolutely necessary.

Alina Trigub · Answer

@James Gleeson As @Brian Burke so eloquently put it, your credibility book must include a track record which in turn will generate an investors' potential interest in what you do (aka your investment properties). The track record can be "borrowed" by partnering up with an experienced sponsors.

I also second what @John Casmon said about the sponsors' compensation. There is a direct correlation between the amount of time and effort you put into a deal and your compensation. As an equity investor one usually reviews the Executive Summary (aka Offering Memorandum) and maybe does a little bit of Q&A with a sponsor to make a decision to invest. Considering how much time is spent on such review, this is a very viable option for folks that are not interested to be actively engaged in real estate investing or have very limited bandwidth.

Guess who does the rest of the work in terms of finding a deal, negotiating it, doing the due diligence, obtaining financing, finding investors, closing, doing the asset management, putting the team together and many more other tasks?! So GP's (aka syndicator) compensation comes with a price.

So at the end of the day, it all comes down to your availability and long term RE goals. Happy to share more offline, feel free to PM me.

Best of luck!

Brian Burke · Answer

Sponsors of offerings that aren't advertised can accept up to 35 non-accredited investors as long as they have a relationship with the investor.  Some sponsors won't accept non-accredited investors at all, even if they do have a relationship.  Others will.

My guess is the reason a lot of books say this is because they are written by syndication sponsors, so it furthers their cause to say that investing passively in one will help you become a sponsor yourself.  Part of the motivation for a sponsor to write a book is to build their investor base, and most successful sponsors know that most people who want to be sponsors won't be once they find out how hard it is.

Whether investing passively truly does help one to become a sponsor themselves is a question that I doubt we'll ever get a definitive answer to.  Out of the several hundred investors I have I don't think any of them are sponsors themselves, but perhaps they don't aspire to be, either.  Or maybe some are and just haven't told me.

But at least you would get to see how they underwrite, what their quarterly reports look like, come to understand the operational decisions that they make, etc.  There is value to that I suppose, but that's only the mechanical side of the business.  There are so many more sides to it that the passive investors will never see, much less benefit from.  So maybe it helps, but it isn't the key to the kingdom, so to speak.

Scott Morongell · Answer

@James Gleeson So much valuable information already laid out by Brian and many others. From a high level:

Provide value to an operator already doing what you want to do

Build your brand

Tell people what your doing and why

Provide value to others that your ahead of

Partner/raise capital with a more experience operator on a few deals (gain credibility)

Be a lead sponsor on deals moving forward or JV

Theo Hicks · Answer

I second @John Casmon. You need to have verbal interest from investors. Otherwise, you won't know what sized project you can take down.

In regard to the best way to raise money, you will likely need to start with family and friends for your first few deals until you build a strong enough track record to attract outside money.

What is the best way to raise money for a multifamily deal?

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