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Psst … The # 1 Secret to Raising Money to Invest in Apartment Buildings

by Michael Blank on December 23, 2013 · 21 comments

  
Apartment Complex

Having your investors committed before you even put a property under contract is critical when syndicating apartment building deals. Without upfront commitments from investors, you won’t be able to submit offers confidently and it will be difficult to get the money in time to close.

This “catch-22” keeps most real estate investors on the sidelines. This frustrates me because it doesn’t have to be this way.

Last week we talked about Why You Should Raise Money to Buy Apartment Buildings. This week I’ll share with you a secret that will let you raise money from private individuals long before you have a deal under contract.

This means you can get started today, right now.

The secret is so secret that I’ve never heard it revealed anywhere else.

The secret will stun you with its simplicity.

The Secret Revealed

The secret to getting financial commitments from your investors long before you have your first deal under contract is to … make a up a deal.

Huh?

You “make up a deal” by creating a “Sample Deal Package”. This document contains everything about your fictitious deal including photos, information about the building and area, actual financials, your business plan, projected financials and returns. You will use this Sample Deal Package to speak with potential investors. You will even use it to build credibility with other professionals you’re trying to recruit to your team (like commercial real estate brokers, lenders, insurance agents, attorneys etc).

The difference between a Sample Deal Package and a real one is that all of the information about the deal is accurate (photos, location, financials, etc), except that you don’t have it under contract. The other difference is that your fictitious purchase price may be lower than the asking price so that you achieve the desired returns for the investors. In other words, you approach your potential investors with a deal package that looks like the real thing.

But how do you create such a Sample Deal Package?

Find and re-purpose the marketing package for a listed property and turn that into your Sample Deal Package. It will contain an executive summary about the building, investment terms and potential returns; information about the building and area; photos; actual financials; projected financials; potential estimated returns for the investors; and information about yourself and your team.

Where do you get all of this information? One good (free) source is www.loopnet.com, which lets you search for the kind of deals you want to do. Download a good marketing package and get to work.

Having this Sample Deal Package does several things for you:

  1. It allows you to better visualize your deal. This is critical as you expand your own comfort zone with doing your first commercial real estate deal, or doing bigger ones than before. Seeing the photos, visiting the property, writing and talking about it make this deal real for you. The more real it seems to you, the more comfortable you become and the more confidently you can talk about it.
  2. It empowers you to get started now. You can now schedule meetings with potential investors and say, “I don’t have a deal right now, but when I do, it’ll look substantially like this” and then you show them the Sample Deal Package. It gives you something to talk about today.
  3. It will allow you to get financial commitments from your investors long before you actually have a deal under contract. By the time you get a building under contract, you’ve already primed your investors and received financial commitments based on a deal substantially similar to that in the Sample Deal Package. When you actually have a property under contract, you will send your investors the real Deal Package, re-confirm their commitment and close on time.

Creating a Sample Deal Package allows you to get started NOW with apartment building investing. It allows you to better visualize your deal, gives you the confidence to make offers, and secures commitments from your investors long before you put your first property under contract so you can close on time.

In later weeks we’ll talk more about what how to find potential investors, how to conduct your first meeting, what investors look for, and how to structure the investment.

In the meantime, I’d love to hear your thoughts about how you think this “Sample Deal Package” approach would work for you.

Photo: homeisjchart.com

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{ 21 comments… read them below or add one }

Gerald Harris December 23, 2013 at 9:22 am

Nice Article

This is great information. To package a deal in such a way where you can market it in a professional way to you cash buyers. Several months ago i downloaded a free version of this software call “Rehab Valuator”. I am in no way marketing this product but what it does is it allow you to package your Commerial or Residential deal in such a way that allows you to market to your cash buyer investors. Type those words into google and your can find it.

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Ken Cardillo December 23, 2013 at 11:07 am

Michael – thanks for the insight! Pretty simple concept but I’ve always struggled with how to get started. When thinking about it, I get into a which comes first, the chicken or the egg, mentality. This tends to be paralyzing. Creating a sample deal package opens the door to start discussions with investors/lenders prior to having the asset picked out.

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Michael Blank December 23, 2013 at 7:54 pm

Exactly.

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Ken Cardillo December 23, 2013 at 11:19 am

Next question – how do you find local investors that are interested in discussing hypothetical lending deals?

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Michael Blank December 23, 2013 at 7:55 pm

Good question, I’ll work on an article !

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Giovanni December 23, 2013 at 11:53 am

Great post Michael, your insight of how to crack the Catch-22 of having cash to close vs. doing a blind pool is pure gold. It also really helps define a number of issues that have to be dealt with before a deal clock starts ticking. First the exercise of putting a deal package together facilitates building a list of critical questions that need to be answered for any deal. Second is the opportunity to make sure you have your math right and are able to present it in an understandable way, and third a chance to think deeply about your return structure and test it with potential investors… all without the pressure of a looming deadline for raising the money.

It really works, I’ve been helping clients develop their packages to go out and raise equity financing using this exact process. It’s even easier if you’ve done a previous property deal, say with traditional bank financing, whose numbers you can reformat into a syndication structure to show investors how it would work on a real property that you already have.

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Michael Blank December 23, 2013 at 7:56 pm

Giovanni – thanks for your feedback!

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Jordan Powell December 24, 2013 at 2:21 am

I thought this was brilliant. Yet, it is so simple. Definitely bookmarking this for a future reminder. Thanks for the post.

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Chuck Catchings December 25, 2013 at 10:17 am

Michael, yes the concept is simple but it’s a double edged sword in my opinion. Why not just do this with a deal that was real and sold to start with? Questions will come up that you may not be able to answer, then what?? The minute you say I don’t know or I don’t have the information that your requesting, your toast and you just lost that potential investor. I work on an international basis not just in real estate but also physical commodities. So I have a real issue with your concept here because I have had to deal with so many made up or fictitious deals (your words) and generally nothing ever happens except you lose the connection.

I understand what your proposing here and I’m not trying to be negative but too me your presenting a bogus deal to start out with and it’s hard enough as it is to find up front and honest people to deal with on a regular basis. To start a deal under deception just seems to me your just asking for trouble down the road. Call me old fashion or old school but honesty is always the best policy as far as I’m concerned. To me your just promoting or empowering people to be dishonest and yes I have a real issue with this, sorry.

I mean what happens if you do get an investor and you can’t find a deal even close to the fictitious deal you presented in the first place? This post probably won’t get posted and that’s O.K. but maybe you’ll respond to this in another one of your articles.

Chuck

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Michael Blank December 26, 2013 at 9:20 am

Chuck – thanks for posting such a thoughtful post! It’s the kind of discussion we can all learn from.

First let me say that there are multiple approaches that can get the job done. This is the one that worked for me when I got started, and it has helped others overcome the “catch 22″ situation when trying to raise money without a previous track record.

If you have steady deal flow (with new deals coming in and previous ones to point to), you don’t need to talk about “sample deals”, you can talk about real deals (much easier!). But in the absence of real deals, properly disclosed fictitious ones are a good second.

Of course, it’s important that you disclose to the investor that the deal they’re looking at is fictitious – you should never try to deceive someone, that will certainly come back to haunt you at one point. It helps if the deal is “representative” of the kind of deal you’re looking for.

But even if you end up doing a deal that *isn’t* representative of your Sample Deal, what is important is that you started a relationship with a potential investor. Then, when you get a real deal and time is of the essence, you are leveraging a pre-existing relationship with someone who already has a certain comfort level with you. At the end of the day, it’s about the relationship.

I’d be interested in any other ways you guys have been able to raise money from investors when you were still starting out.

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Chuck Catchings December 26, 2013 at 10:01 am

Michael:

Thanks for posting my comment, that just shows me and others that your up front and transparent. It also shows that your open to other opinions that may not be in line with yours. You asked for some other suggestions on how to connect with potential investors for multifamily deals. Well first off you have to get your name out there and network, network,network. You better have a good understanding of what your trying to do here. MF is a whole different ball game to SFRs. There are a few really good forums to network on, BP & LinkedIn are two that I have had the most success with. You will find contacts that deal specifically with multifamily, you have to get connected to these people. As far as project summaries or offers to present to a potential investor they are out there. More often than not you will have to sign an NDA to receive the required information. Unfortunately in most cases the seller will require POFs as well. But I have found that it’s not that hard to find the needed information to put in front of a potential buyer. As you say the deal may not even be available but your at least getting something in front of the investor and starting that all to important relationship. You have to develop a relationship with your sellers as well, once they see that you do know what your doing they will contact you when properties come available that fit your buyers criteria. People looking to do this have to understand that they are an intermediary in these deals, your job is to hook up the buyers and sellers the best that you can and once you get the principles together you get out of the way. Of course this is for people that aren’t real estate agents or brokers. I could write on this for some time to come but will leave it at this for now. Good luck to everyone!!!

Chuck

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Michael Blank December 26, 2013 at 4:11 pm

Thanks Chuck !

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Jonathan Scott December 26, 2013 at 3:11 pm

Great article! I have been doing something similar to what you mention, but it has been more by accident – now I will begin doing it more aggressively, on purpose.

A few months ago, I raised the funds for multi-family building (even before going into contract), but the deal ultimately fell through. Besides for the great experience I got, I now use that presentation when I meet with potential investors and I have received great feedback for it. A few investors that I showed it to said that they look forward to me sending the next similar deal their way.

Thanks Michael!

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Michael Blank December 26, 2013 at 4:11 pm

Thanks, Jonathan, for sharing!

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Matt Buckels December 27, 2013 at 11:43 am

Interesting article, though there is a way to expand on it. Raise your funds in a semi blind pool. Many REITs operate that way. Just as in your concept, outline the types of properties you plan to invest in, but have yet to source. You can then take the funds in ahead of time and have them long before closing. Of course all this needs to be stated in your PPM, but a good securities attorney could handle it. No more wondering whether you will have funds to close or not.

Much success.

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Jacob Thomas December 28, 2013 at 9:31 am

I have been doing what you are recommending, so thank you for validating this idea! But it hasn’t been working for me yet. My investors are interested and say they would like this deal, but I have put great deals under contract assuming I could fund it, only to hear that they weren’t committed. What can I do to be more sure they’re committed? Do you ask them to send their funds into an escrow account under some predetermined terms, but without an actual deal in place? And if so, do they get to back out if they don’t like the deal?

I have felt that having a real deal with real deadlines creates urgency and motivates them to move quickly. Has that been your experience?

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linda December 29, 2013 at 7:03 pm

What is the web site for BP? thanks.

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Brandon Turner December 29, 2013 at 9:20 pm

Hey Linda – you’ve found it! This is BP – BiggerPockets.com :)

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Raymond Autry January 8, 2014 at 6:46 pm

Thanks, Michael…
I am trying to put my first development deal together. I have identified the site in South San Francisco and want to demolish the existing retail structure and replace it with underground parking, so I can use more of the surface for and Office Bldg, Hotel, multi-family, Condos and Retail. Am going to have to raise lots of money to do the deal and your “Sample” has me pointed in the right direction.

Thank you!!!

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Michael Blank January 9, 2014 at 6:12 am

Glad it was helpful !

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Duncan Wilson September 12, 2014 at 5:21 am

Thanks. Am beginning a Deal Package now. I am a success on this. Also, grateful to God and you, locating Biggerpocket, meaning, am @ the right place and @ the right time. Thanks, helping me to listen, twice. Please, say me, WELL, to BP Family on the good work, always, done. I celebrate and appreciate your Transparency and Integrity. I seek more advice, as the need arises. Thank you.

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