Which is first, the deal or the partners?

Question

I have heard several podcasts related to Partnering to scale up and buy a commercial apartment building.  It sounds like they get a deal under contract and then raise the capital. How is that possible for someone inexperienced ? I'm struggling with the chicken or the egg scenario.  If someone never owned an apartment building or raised capital before  I can't imagine their offer would be taken seriously much less get it under contract.   If that same person tried to raise capital I imagine they would receive  the same resistance.  I have heard its recommended to be an LP and try to learn the process but how involved can you be as an LP?  I am struggling with the next step.

John Heisler · Answer

I don't do apartments specifically but jumped into larger commercial deals (office) from residential and it helped to find a fellow investor who was ahead of me in office who was willing to partner. We found a building we liked that was bigger than what he had done before. We leaned on his track record and were able to convince a few investors to LP with us to purchase the property. We told all our investor friends we were getting into commercial and it helped sourcing deals, raising money!

In short, tell everyone your plans, keep yourself out there, don't afraid to do smaller deals to step up to larger multifamily if that is your goal. OR go work for a team that is already doing it. Learn how they do it and copy it.

Adrian Fajardo · Answer

@Brian Plajer The answer is neither one. It should start with the investor (You). To those that say "Partner", it is difficult to partner with someone who has nothing to bring to the table (experience, knowledge, or capital). Even if you can bring capital to the table, most experienced teams would already have a preferred source of funding that can deliver when called upon (experienced). To those that say "Deal", how do you know how to value a property? In other words, how do you know what a "Good" deal looks like? Underwriting is a valuable skill.When an investor starts by helping him/herself, both deals and partners will take care of themselves. What I mean is, that education is key. Experience will come in reps and is provided in partnerships. When you immerse in a community like Biggerpockets or meetups and also learn on your own time, that is a sign of someone who wants to develop and do this for the long-term. In turn, that attracts experienced investors because they don't just want another guy/gal who's looking to "close" on something (I'm not claiming you are one of those).I hope this helps! I wish you the best of luck in your investing journey.

Michael Dumler · Answer

@Brian Plajer, you're correct, the offer would not be taken seriously without prior experience and a track record, this is why your chicken and egg scenario needs to be played out from both angles. There's nothing in the rule book, nor is there any rule book for that matter, that is stopping you from networking to build partnerships and sourcing deals simultaneously. I agree with John's advice, start telling everyone what you're looking for and if needed, tackle a few small deals on your own to gain a reputation. Hope this helps!

Account Closed · Answer

I would bring partners in as late as possible. If it’s turnkey, you should have the property under contract and the due diligence and appraisal completed plus have your portion as cash in the bank.

If the project is a renovation, you should own the building outright, have completed due diligence and have the construction quotes in hand.

Of course, you need to have the pro forma, 5-year projections and a spreadsheet that describes the payouts, spreads, rate of returns and stuff to the equity investor.

If all the numbers make sense and the equity parter understands what they are getting into, they will will listen to you

Jon Kelly · Answer

@Brian Plajer I would at least network with potential partners ahead of finding deals so you aren't starting from scratch. It's good to know "if I find a deal I can contact "X", "Y" and "Z". You don't need to formalize an agreement before finding a deal.

The deal is always the most important. A great deal can attract a lot of investors/partners

Adrian Fajardo · Answer

Good on you for investing in yourself. Most of it is knowing your market well. Once you get the overview in underwriting, just keep doing it over and over until you can get a database on what rent and costs are in your market. I wish you the best of luck!

Michael Patton · Answer

Hi Brian -

This all depends on you and your goals. You will get different advice from everyone and you just have to take in all the data and make the best informed decision. There really isn't a right or wrong. The only bad decision, is no decision.

It is great you are taking action, learning, and attending classes. At some point you need to pull the trigger. Here are just a few things (my opinion, so just use as more data) you might consider.

1. Ask yourself what you bring to the table for a deal as well as a partnership? Do you bring underwriting skills, money, relationships, asset management to the table? Meaning, why are partners that are experienced and doing well in the market going to want to partner with you?

2. Do you really think you are ready to go alone (even if you just go alone to get a deal lined up, are you ready to not miss anything in submitting an LOI, DD, etc?).

3. What size of deals and class of property interest you and why? What markets and sub markets are you looking at?

4. Have you established relationships with brokers?

5. Have you started to build your own team? (Lender, broker, insurance, atty, CPA, contractor, PM companies, etc)

These "classes" are good for the basics, but most are BS and won't prepare you for what needs to be done. You will think you are prepared after the class only to get a rude awakening when you get into a deal.

Oh, and you are right. In this market, if you haven't done a deal before, it is harder to get a deal. Most sellers and brokers will take a lower number if they are more convinced someone will be able to close due to their experience. That doesn't mean you can't do it, as you can do anything, it just means it is another road block as you already know.

Being an LP has a lot of advantages if you want to learn. There are inexpensive ways to do this for your first deal. The key is getting the most out of it. Go into a deal as if it was your deal. Ask for the teams analysis (underwriting), watch how they do DD, line up lending and what type such as bridge, plan to renovate and timeframe, exit horizon and goals, etc. The more you are prepared going in, the more you will get out of it and advance your learning exponentially instead of a death by a 1000 cuts. Create your own learning bootcamp so to speak.

Mike

Brian Plajer · Answer

@Adrian Fajardo thanks for the great advice. Since posting this I have attended a one day workshop regarding analyzing apartment buildings and I have registered for a 4-day workshop that includes a home study course as well as an 8-week follow up mentoring. All geared toward finding, analyzing and making your first apartment building purchase. I'm looking forward to the education and experience!

Jonathan Soto · Answer

deal. partners will come. but it depends what role you play.  are you the deal finder or are you the handy man or money guy. if 2nd is you then partner may be first.

Eliott Elias · Answer

Get partners lined up first. A good deal can be vetted and underwritten in a few hours, a good partner needs weeks maybe even months to vet before you feel completely comfortable doing business with them. Referrals are always great and don't require as much vetting, but these people are often chin high in business

Which is first, the deal or the partners?

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