Thank you in advance for any advice you can provide me. I have worked for a private equity firm for a few years as an analyst and have a good understanding of acquisition underwriting for several asset classes. I enjoy retail commercial and multi family apartment buildings. My lack of experience is more related to raising capital, but I am starting to learn more as time goes by.
With that said I am wanting to personally invest in a commercial building and/or an apartment building and need some advice on how to do this as a first time buyer.
As an analyst for an established company it is easy to underwrite deals knowing that the company I work for has access to capital. However, if I am wanting to buy a commercial/multi-family property for myself how difficult is it to find debt financing, if I don't have enough equity financing to pay for an entire property.
For example if there is a 3 million property that I would like to buy and I raise 1 million from equity investors, how hard is it to find a lender that would provide the additional 2 million in debt, especially coming from a new investor like me?
Also, this might seem like a silly question, but when putting offers on commercial/multi family apartments, do sellers expect that the buyer will have financing in place before even making the offer? Or do buyers raise capital during escrow?
Thank you again,
@Austin Glidewell - You need to have the financing in place before you offer. I would create a sample portfolio of deals in your area that you would buy (on the market or recently sold) and bring that to the banks as an example. You need them to be comfortable with you and your abilities first.
Then once you have that you will need to raise the idea of equity. Be careful because it is a SEC violation to solicit anyone directly, but if they have approached you about investing then it is ok. Show them the same sample portfolio and get a ballpark idea of what terms they are looking for and how much they would contribute if you bought a deal like the example to them. Then keep doing that till you have enough people interested to actually buy a deal.
It really comes down to the type of lender you are going after. Traditional banks may be a little harder since you do not have the experience of buying commercial yourself. The advantage here is that their interest rates tend to be lower. However, if you find a private lender, their underwriting tends to be looser than the traditional banks. The disadvantage here is that their interest rates tend to be higher (8%+). In my opinion, you cleared the hardest hurdle which is raising capital from investors. The fact that you now have capital to bring to table will show a lender that you are serious.
I'm currently in the process of switching my business model from residential redevelopments to commercial and apartment investing. My plan is very similar to yours however I am approaching building owners with high equity and negotiating short-term financing and raising the reminder through equity partners. The theory is within a few years I will build my "experience" and credit in the banks eyes to be able to replace the seller financing. I've done this multiple times on smaller assets but this year I am attempting this on 100+ unit complexes. Raising the money, either through debt or equity along with finding a banking institution to lend on a building is a lot easier then you can imagine. Money is everywhere! Finding the deals are the toughest part. Keep me posted on your ventures and i'll do the same. Hopefully we can help each other out one day!
General Solicitation became legal in 2013 to accredited investors only. I've never heard of it being illegal to solicit individuals, but there are regulations about it, such as a maximum amount of funding, and the mix of accredited and nonaccredited investors. This is known as Regulation D exceptions to the SEC. If you keep the funding just under a million for a year, that places you in the most lax exemption for Regulation D, and you can solicit nonaccredited investors.
I think your lack of operational experience will be the biggest obstacle for a lender. If you partner with an operator that has banking connections for the first deal or two that would probably solve that problem.
The other option would be to find a stabilized asset. If you find a stabilized multi-family asset banks are very excited to loan on it these days.
- For example if there is a 3 million property that I would like to buy and I raise 1 million from equity investors, how hard is it to find a lender that would provide the additional 2 million in debt, especially coming from a new investor like me?
So that's an LTV of 66%; normal ratios for commercial are in the 70-75% range
- Also, this might seem like a silly question, but when putting offers on commercial/multi family apartments, do sellers expect that the buyer will have financing in place before even making the offer? Or do buyers raise capital during escrow?
When I bought, that was not the case. I'm about to sell and will require:
- a letter of Pre-Approval for the offered amount AND
- a letter for Proof of Funds for the down payment
and that's only to discard the D*** lookie-loos. A series buyer will understand and be able to crank the numbers to evaluate *IF* he's really interested and then jump head long into the process.
- and I raise 1 million from equity investors
now that's an entirely different matter. You've got borrowed fund for the down payment so you will need to create a structure like an LLC and buy from that position.
Hey Austin. Was scrolling through the forums and saw this. I can relate to what you're thinking. I too am an analyst for cbre but want to start investing in commercial. Two books that have really helped me understand what I need to do to make it happen are 1) Commercial Real Estate Investing by Dola De Roosevelt 2) Commercial Mortgages 101 by Michael Rinehard
Personally I feel in OC with the demand for residential there's some good opportunities to acquire commercial property with development upside down the track. What are your thoughts?
*Commercial Real Estate Investing by Dolf De Roos