Access to Capital - What to do next

[Phil C.]

Currently me and a partner own and manage 12 units. We are looking to add more units and grow but are not sure exactly the best way to do this. I know we have access to capital using debt financing (~$100k or more @8% - Structured as a LOC) but we also think that we have a lot of interest in structuring an equity deal - $100-$500k. By the spring we should have enough cash (in addition to our reserves) to put a down payment on another single-family or multi-family property (4 units or less). The way I see it we have the following options:

1. Buy another SFH, Duplex, Triplex, or Quad using our own cash and a LLC Bank Loan - $20yr amort, 5 year term 6.5% rate
a. Least amount of risk
b. Less complicated
c. Slowest growth – takes more of our own cash, and restricts the size of the building/investment

2. Use debt financing at 8% in addition to our own cash to purchase a larger building using a combination of the above plus our LOC at 8%.
a. More Debt = More risk
b. More Growth – can purchase a larger building (or more smaller buildings) by using a combination or our own and OPM

3. Structure an Equity Deal
a. Most Risk
b. More time and effort to set everything up, structuring, legal fees, etc.
c. Potential for most return and growth – we would get property mgmt and financial mgmt fees on top of a share of the Return on the investment
d. This is by far the most complicated but could have the biggest return and fastest growth
e. Never done this before so I anticipate a steep learning curve

So, I am curious as to what others would try to do in this situation. Just looking for opinions and advice on moving forward.

Thank you in advance for your replies.

[Bryan Hancock]

I didn't read all of the replies, but this is something that you'll ultimately have to match to a project. I like raising equity for larger projects because the large amounts of debt are burdensome on your ability to borrow going forward. Keeping about 10% of your long-term debt in liquid assets will allow you to continue borrowing more debt and thus your access to future capital is less constrained. This is something people don't really think through very well in my experience.

I'm not sure I completely agree with your assessment that raising equity is more risky either. Debt on large investments is more risky IMO.

For small projects that are quick-turn in nature the cheapest capital is generally either bank financing or private financing. If you're in business for yourself private debt financing is probably the best way to go as long as the rate and points are pretty favorable. JVs are probably next in line for small projects. Raising money in a fund is going to have too much overhead on anything south of $1M or so.

Lines of credit are overrated in my opinion. I think they serve some good purposes, but if you're sourcing capital for a certain type of deal you'll probably be better-served procuring capital once the deal is tied up ideally. A lot depends on your timing for capital needs and how you can structure a contract too. If you can get a 90-day contract and raise the money afterwards it is a TON easier than raising it in a blind pool. A lot also depends on your relationship with your investors. If you have done several deals with them and know they'll perform you can operate in a much different manner than you can if you're having to hope they'll come through when you need for them to put the capital up.

Feel free to call me later this week Phil. We haven't chatted in a while and I can probably help you out a lot w/this ;-)