How can real estate investors find the money for their multifamily real estate deals?
There are many advantages of investing in multifamily real estate—even over and above single family home rentals. Still, with bigger and more expensive properties (and returns) come bigger price tags and financing needs.
There are multiple ways to go about raising funds for multifamily property investments. The best path oftentimes depends on the deal, though there are options no matter what stage you’re in. On most deals, you’ll want to utilize the power of leverage. Typically, the first go-to solution is to try and get a commercial mortgage loan from bank. These typically require 25 percent down. However, on an $8M deal most people do not have $2M in cash lying around. So, they need to go raise it from somewhere.
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If a bank can’t give you all the money you need, then seller financing—or a combination of both—can help. Owners understand the dilemma, especially when the property needs major upgrades. Even the largest and wealthiest funds and fund managers won’t typically put all of their own cash into a deal. Still, ask. Perhaps the seller will provide some financing with a lower down payment or a second mortgage. Be sure to watch the amortization rate, as that can impact your cash flow a lot. The more years, the better.
Friends and Family (Your Inner Circle)
This is where most people go to raise funds at the start because generally, the relationship is already established. Relationship is everything when it comes to doing the best real estate deals and borrowing or lending. Your friends and family already know you. You want to help them get better returns and better protect their money, too. They can loan you the cash or partner up with you.
Expanding Outside of Your Inner Circle
When getting started in real estate investing, you may not have the strongest inner circle. It may be a bad time to borrow or invest alongside your family or closest friends. As you grow your network and database of contacts, you’ll have access to more people who know you, like you, trust you, and want to share in your success.
Raising money in this way often relies on reverse engineering to find individuals who are seeking ways to invest their money. Generally, these are busy people in high-paying jobs such as lawyers, doctors, software engineers, etc. The value you bring is helping them make money with their money so they can focus on other things, like their careers and families. Not everyone wants to be full-time in this field.
BiggerPockets is a great source for finding other like-minded investors as well. Fair warning: Going right at someone to ask if they would like to invest with you without establishing rapport is not the right approach. I freely share my personal experiences and tips on the site. If someone likes what I am doing and decides to invest with me, that’s good. If not, that’s fine too! People will come if you give them enough value and if they deem you a good fit.
Related: Sorry, But Cap Rates and Cash-on-Cash Are Worthless When Evaluating Multifamily
I got started using real estate crowdfunding method on the single family side. This means raising smaller amounts of capital from a larger number of investors. It can work really well. It provides great liquidity, lower risk, and leverage for all involved. It is a swift way to invest for those with capital, as well as those who want to earn while learning from the experts.
After providing consistent returns to partners, friends, lenders, and crowdfunding investors, they then tell their colleagues. They may brag about the results or simply want to turn people they care about on to the benefits. Do a good job for the referrals, and they’ll bring more.
Trying to raise funds for your first multifamily real estate deals can seem daunting and discouraging sometimes. It doesn’t have to be. There are many options beyond the traditional commercial mortgage loan. Know your choices, and find the right place to scale from for you and the deals on your desk.