Why not Take Loans Instead of Raising Capital?

[Shafi Noss]

I've been wondering recently about the advantages of borrowing money over raising money from investors. After financing 75% of the purchase price for a multifamily from a bank, many syndicators raise money from themselves and other investors to cover the remaining costs, in fact I've never heard of any strategy other than raising money.

Why not get the additional capital from another bank, credit union, or other lender? It seems like interest rates would be lower and the process more standardized. Has anyone ever heard of borrowing the entire capital stack or have any insights on the pros and cons of raising money from investors?

[Brian Burke]

What bank would make that loan?  Banks are a conservative group of folks. They aren’t in the business of taking on much risk.  If they loan you 75% of the value of a property, they can foreclose on you and sell the property and recover most, if not all, of their money.

If they loan you 100%, and subsequently foreclose, they will suffer a substantial loss.  Equity investors are willing to take that risk in exchange for higher rates of return, i.e. 14-18% versus the bank’s 3.75% for the “safe” portion of the capital stack.