All Forum Posts by: Brian Moore

As a new investor, I have a couple of questions regarding raising private money. My business partners and I are putting together a pitch and list of who we would like to start approaching to fund our deals. We have seen many properties and can actually make moves on a couple the only restriction is that we do not have the capital to do it ourselves. We came upon a couple questions that I thought the biggerpockets community members would be a perfect source for. Please review the list of questions below, any help and feedback from past experience is appreciated as I am sure we can learn from all of you. I know that some of these might be beginner questions but I wanted to get an understanding of the different type of scenarios that can arise during this process.

- If an investor wants to invest with us, how do we go about having the individuals contractually bind to the investment, if at all?

This question is "the cart before the horse" since your title is raising Private Money but your questions revolve around a Private Placement. Answering from the perspective of a Private Placement - you will send your potential investors a subscription agreement, private placement memorandum and other investment docs prepared by your attorney. Typically when they sign the subscription agreement they are on the hook.

- Should we wait till we have investment opportunities to start raising private money or do we go about pitching private money without opportunities yet? Being a beginner this is something that will be a huge obstacle for us, so I wanted to know how some of you overcame that obstacle? Property first then pitch, or pitch first and look for properties, or 50/50 etc.?

I would say you should have closer to 75% committed investors before you find your first deal. Keep in mind that once you put a real deal in front of people you will find that several will not go forward for various reasons. I would have an investor pool large enough to oversubscribe the deal by 125% (I recommend using all accredited investors), if you get more than the 100% needed your subscription agreement should give you authority to reject investors.

- Once a deal is found, who's funds out of the investment pool are used first, is there a priority based on the money raised. For example, if we raise 50K but only need 30K, how is that decided on who's funds we utilize first for the deal? Not wanting to leave anyone out of the deal who wants to participate, not sure how that step of the process works.

See answer above.

- When pitching for private money do we pitch from the angle of it being an investment pool, asking if the investor would be interested and then once we are finding deals we send those deals to all the investors we met with and see if they are willing to join in on it? or is it suggested that we come to the table with properties and/or pitch an individual property?

You need to have your documents done first. A good attorney will run you $8-12k for the Private Placement documents, which you can generally re-use for future deals. Your first deal needs to be a really good deal and you must show large returns to investors (subjugating your fees and returns as necessary to make investors comfortable). Once you have a deal under contract with the longest attorney review period you can get (2-3 weeks), send out your investment docs to as many accredited folks as you know with a deadline to invest. Get your investors funds up front. If you don't have 100% of the equity you need before the atty review expires it is decision time.

- If a deal were to go sour and multiple investors are in on it, how is the money divided up to pay them back, do they sell the property and divide the proceeds? or is the property foreclosed and upon sale the dividends are allocated between the investors?

If the deal goes sour there may not be any money to pay investors. If it is foreclosed upon the investors will ALMOST DEFINITELY not get any money. Your investment documents will spell out how the returns are split. If you are invested you may set it up so that you don't receive any of your investment back until the other investors are made whole. In a worst case situation, you may need to pay investors from your own pocket to keep them for future deals, otherwise your business model won't sustain itself and this was a failed venture. It is wise to expect the best (happy repeat investors) but prepare for the worst.

Thanks again for your help and I look forward to hearing back all your feedback.

-Luke

I wish you luck in your endeavor.

Brian

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@Danny Duran You have to understand the true market rent, not the current lease rent, since many long-term landlords that have 'vintage' 3-flats prefer the "easy" way of renewing leases at a $20-40 bump instead of increasing all the way to market. I expect (recommend) you will be doing some rehab which will increase the rents further and allow you to come closer to your 1%.

To answer your question on why people will accept a 0.7% in Logan Square: the answer is appreciation. Property values have gone up 10-15% per year over the last couple of years there and the trend seems to be continuing into the foreseeable future. I expect rents are increasing at a slower pace, but still you can build substantial equity by buying a 0.7% deal. Now is a good time to stretch for the deal (RE: income ratios) because the relatively low risk of losing value/putting your equity at risk.

CASE STUDY IN APPRECIATION: I started investing by buying a 3-flat in Wicker Park in 2001 that my wife and I STRETCHED to buy. We lived in it for 4 years and it was a little above break-even when we moved out. Now it generates over $25k per year of cash flow. I levered up to 85% LTV in 2005 (took out $100k equity to buy a home in the 'burbs) leaving about $120,000 in equity. Now with my principal reduction and appreciation we have over $500,000 in equity in the property.

1 Vote

@Daniel J. I am a fellow MArch joint degree at UofI (got my MBA too). I have worked in real estate since I got out of grad school 15 years ago and started my own small multifamily investment business 2 years ago.

My advice, get on Redfin, find properties that interest you and start setting up showings. You need to train yourself to estimate the amount of work needed to bring the place up to a standard rental. Get yourself a laser measuring too and draw the floorplan as you tour. Your construction connections will be great resources to 'price' the work. Do that excercise a few times and you will be able to separate the wheat from the chaff.

Your architecture background will be more effective in gut rehabs or new construction. I have done a few gut rehabs (no new construction yet) where I designed the space and handed to the architects to draw up.

Many opportunities out there for multifamily investors in Chicago. I wish you luck. Oskee Wow Wow!

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I know this thread is a few months old but I just started posting on BP (despite reading the forums for a year or so) and I am finding that I have a LOT to say:

@Joel Owens Great initial post. Something that every flipper and rehabber should be aware of when they first analyze their deal.

In Chicago where I do business the deals are priced as a multiple of gross income (GIM = gross income multiplier) and to a lesser extent, cap rate. To increase the value of your multifamily property you MUST raise rents. If you can make your deal pencil out for less rent and you achieve a good return, then that's great. Most often I am pushing rents to the max and would prefer to sit on a vacant unit for a month (8.3% vacancy) instead of cutting rent $100 (5%) because next month the property is worth $12,000 more (10 GIM x $100 x 12 months).

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I agree with J Scott that most accredited investors are fairly sophisticated and look for IRRs. What is the appropriate IRR for a flip? Good question. It should depend on the location (better locations would have lower IRRs) and the amount of risk in the deal (major rehabs would have higher risk and thus higher IRR than a coat of paint flip). IRRs are also driven by alternative investments (stocks, bonds, savings rates) as the projected returns on these investments decrease, so does the IRR required to attract capital to your deal. My experience (I am a buy & hold syndicator, still waiting on the right deal for my first flip), investors today expect 15% minimum IRR (low risk.) On a flip I would not show an investor an IRR less than 25% and in riskier deals a 50% IRR might be too low. Would love to hear what other flippers are offering their investors.

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J Scott I think what Deano Vulcano means is an OLD cast iron or galvanized pipe (2-3" in dia.). Typically the vent will stick 12" out of the ground (unless unscrupulous seller removes it). See article from Inpectapedia: http://inspectapedia.com/oiltanks/Buried_Oil_Tanks.htm Typically sewer clean outs are of a larger diameter 4"+ and usually made of PVC.

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All Forum Posts by: Brian Moore

Brian Moore has started 2 posts and replied 66 times.

Post: Questions about raising Private Money

Post: 1% Rule Multi-family Properties – Where are you hiding them, Chicago!?

Post: Newbie from Chicago, IL

Post: If you are thinking of flipping MULTIFAMILY read this!

Post: Returns on Flip Properties

Post: House Flipping Red Flags