Find the deal first vs. getting financing/partner in place first
Real Estate Investor · Downers Grove, IL · Member since 2016 · 20 posts · 3 votes
Find the deal first vs. getting financing/partner in place first
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Investor · East Grand Forks, MN · Member since 2015 · 105 posts · 64 votes
9yWelcome to the game! I agree with @JD Martin that to look for deals and then find the money is bas akward, UNLESS you personally know plenty of people with money and they have said when you find one let me know. Which would be fantastic but most everyone I know has a harder time finding the funds than finding the deals. You being a commercial RE broker you may have people who like you with deep pockets who are willing to gamble on you as a newbie to real estate investing. You tell us.
Think of it like any other purchase i.e. car shopping. If you go out and find a great deal on a car, then sit down at the table, try an negotiate a good deal and get financing, 1 - your chances are better at getting a good deal if your waving cash and 2 - if you find out you can't get financing not only did you waste your time and the sellers time, BUT someone will quickly be by to buy that vehicle you fell in love with.
Opportunity favors the prepared!
As for the typical split, as I say all the time "It depends". It depends on the type of deal, the quality of the deal, the person lending and the trust or relationship to you. Everything is negotiable and is usually dependent upon the relationship you have built or not. 10% - 12% is pretty common and usually requires points and typically will want you to come to the table with 20% of the deal.
My mother-in-law loaned me money at 0% interest, with no time frame and no paperwork, because she knows me, knows that the deal was good and trusts me with her money. I paid her back in 6 months and gave here 12.5% (25%per annum) because I love her and want to be a blessing to her too.
On one of my 1st deals I borrowed $X at 25% for 12 months but the lender also gave me free labor on the rehab which to me was worth way more than the interest I paid him.
So it all depends.
May your hard work cross good opportunities.
Glenn
16 Replies
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Welcome!
1. Personally, I think that is poor advice. You end up wasting a lot of people's time if you have no financing plan in place. That doesn't mean you have to walk around with a check in hand, but good deals don't last long - certainly not long enough for you to schlep around town looking for a financier.
2. Depends on how its financed. If I am doing nothing but loaning money, I generally expect nothing but interest, maybe with a position on the note if warranted. If I am providing anything more than that, I am going to want a split. I don't like having partners either way so I don't do either, but some guys in my neck of the woods do nothing but loan money and provide phone numbers of their contractor base, and they pull interest and a split of the sale. Whatever you work out, always start from the premise that the investor is going to be offering whatever is best for them, so I wouldn't worry too much about "giving" them anything.
Skyline Properties - Real Estate Investor · Downers Grove, IL · Member since 2016 · 20 posts · 3 votes9y
Hey JD,
Thanks for getting back to me so quickly..... In regards to the first question, I was also told to get the deal under control (get it under contract) and I would have a contingency for financing, so that would give me time to get a money partner...... If I couldn't find the money, then the deal would simple die. Is that a bad way to do business? Seems kind of backwards to me....... Thoughts? Thanks again in advance for your thoughts and your time.
- Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes9y
@Bill Fleener For my first investment property, the partner brought in the down payment, and I put the loan in my name, and we split everything 50/50. For me, that arrangement worked and it was a start.
- Tom
- Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes9y
The structure that @Tom S. commented about is an arrangement I've seen work for a lot of investors. My advice to you (also as an inexperienced investor) would be to spend more time attending local meetups and network your butt off. Meet people doing what you want to do and it seems that will lead to finding money and partnerships. That way you have both deals and financing at the same time and you've got people that can help you through the deals.
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes9y
@Bill Fleener, yes, that's a bad way to do business. Financing does fall through so you'll want to have that contingency there but you should be doing everything in your power to make sure you follow through on your promise to buy. The people selling to you are usually in a very tight spot already and you could be making it much worse.
So although I generally agree that having a good deal is more important than having the money, it doesn't have to be a chicken/egg thing. Talk to lenders (private/hard/bank, etc) ahead of time and find out their criteria for lending. Have them confirm that if you bring them a deal that meets those criteria that they will be able to provide you the money. They don't have to wire you the money right away and you don't have to walk around with a cashier's check but you've done what you need to ensure a likelihood of closing.
Question is... you don't have the money but do you at least have the experience and knowledge? Would you know if a deal is good?
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Bill Fleener:
Hey JD,
Thanks for getting back to me so quickly..... In regards to the first question, I was also told to get the deal under control (get it under contract) and I would have a contingency for financing, so that would give me time to get a money partner...... If I couldn't find the money, then the deal would simple die. Is that a bad way to do business? Seems kind of backwards to me....... Thoughts? Thanks again in advance for your thoughts and your time.
Yes, that's a bad way to do business. A lot of sellers would require proof of funds or proof of pre-approval before doing a deal anyway, so that might not be an issue for some sellers, but for those that went on good faith they would be bound to whether or not you had the mining ability to secure financing. Your instincts are right that it is backwards.
Skyline Properties - Real Estate Investor · Downers Grove, IL · Member since 2016 · 20 posts · 3 votes9y
Thanks Michael,Pete and Tom! I was a commercial RE broker for about 10 years (got out of the business 6 years ago) so I understand the business and have lots of RE experience and knowledge. I just need to find the money partner/s and of course the rest of the team (Attorney, contractor, loan officer, etc). Kind of overwhelming and it gets in the way of moving forward. I wish I had a checklist of what I need to do from start to finish so I wouldn't be so distracted. Just not sure what the next steps are........ Any thoughts or direction is appreciated!
- Investor · East Grand Forks, MN · Member since 2015 · 105 posts · 64 votes9y
Welcome to the game! I agree with @JD Martin that to look for deals and then find the money is bas akward, UNLESS you personally know plenty of people with money and they have said when you find one let me know. Which would be fantastic but most everyone I know has a harder time finding the funds than finding the deals. You being a commercial RE broker you may have people who like you with deep pockets who are willing to gamble on you as a newbie to real estate investing. You tell us.
Think of it like any other purchase i.e. car shopping. If you go out and find a great deal on a car, then sit down at the table, try an negotiate a good deal and get financing, 1 - your chances are better at getting a good deal if your waving cash and 2 - if you find out you can't get financing not only did you waste your time and the sellers time, BUT someone will quickly be by to buy that vehicle you fell in love with.
Opportunity favors the prepared!
As for the typical split, as I say all the time "It depends". It depends on the type of deal, the quality of the deal, the person lending and the trust or relationship to you. Everything is negotiable and is usually dependent upon the relationship you have built or not. 10% - 12% is pretty common and usually requires points and typically will want you to come to the table with 20% of the deal.
My mother-in-law loaned me money at 0% interest, with no time frame and no paperwork, because she knows me, knows that the deal was good and trusts me with her money. I paid her back in 6 months and gave here 12.5% (25%per annum) because I love her and want to be a blessing to her too.
On one of my 1st deals I borrowed $X at 25% for 12 months but the lender also gave me free labor on the rehab which to me was worth way more than the interest I paid him.
So it all depends.
May your hard work cross good opportunities.
Glenn
- Real Estate Investor · Downers Grove, IL · Member since 2016 · 20 posts · 3 votes9y
Thanks for your thoughts Glenn....much appreciated. I happen to agree with you and will try to find a money partner first. Probably good advice.
- Investor · East Grand Forks, MN · Member since 2015 · 105 posts · 64 votes9y
I check out peoples profiles before I respond and I love your goals. They are definitely not go easy and cruise goals but they are achievable. As for being overwhelmed - don't let that dissuade you. Feeling out of control is only due to not having a plan. And I think you may be like many analytical, go-getters like myself, if I have a "To-Do" list that I can check off I feel much better. So your going to love me ... 1st remember that all plans are adjustable and scrapable, but knowing that you need a plan is step one. R&D is step 2. Execute is step 3.
So here is your plan.
- Real Estate Investor · Downers Grove, IL · Member since 2016 · 20 posts · 3 votes9y
Thanks for your time and help Glenn! I really appreciate it! Lets keep in touch!
- Brighton, MA · Member since 2015 · 34 posts · 5 votes9y
@Bill Fleener Are you looking for hard money or a partner? Sounds like a lot of people are suggesting 10-12% return for the lender, but if you're buying and holding an apartment building can you find an apartment building with a high enough return to support a long term "loan" that you need to pay 10-12% per annum, plus your mortgage? I think paying 10-12% makes more sense for a flip or quick exit strategy. I agree that finding the money partner first and uncovering what they are looking for as a return makes the most sense. Then when you find a deal that meets their needs, you have already pre-qualified them as a partner.
- Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes9y
@Andrew Kazakoff, I'm assuming he's talking about duplex to 4-plex and not apartments.
- Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes9y
Howdy!
Find the finance first! You plan on using the BRRRR strategy so knowing what the finance terms will be during acquisition and refinance phases are important when analyzing properties.
Therefore, find potential Hard Money/Private Money Lenders. Understand their criteria and terms they offer. Then try to get a Funds Available letter from them. Additionally, you need to lineup a bank to do the "Cash Out " Refinance. Get pre-approved if possible. Get all your ducks lined up to make the process as smooth as possible.
Hope this helps. :)
- Specialist · Plainville, CT · Member since 2015 · 478 posts · 389 votes9y
@Bill Fleener- With your background as a commercial broker, any chance you have some friends that can send you apartment deals? I can help you go that route if you're interested.
- Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes9y
"First, I don't personally have the money to buy/ finance a property, so I'm going to need someone for the down payment and rehab money to make the deal work. "
So you need an equity partner. I take it someone who will be active in management of the asset and knows more about multifamily? Or a passive investor (in which case, you'll be selling a security).
"Using the BRRRR strategy, my plan is to buy the property right, rehab, rent it, refinance it after a year or so and repeat."
This is BRRRR for multifamily? You will need a hard money lender then, as you will run up against steep prepayment penalties for most apartment financing. 5,4,3,2,1 (% for each year of loan remaining) is typical.
"I have been told by some investors not to worry about the money....... go and find the deal and the money will be easy to get."
In spite of my posting something similar previously ("find the deals and the money will come"), I have found it easier to find properties than funding.
"I also wonder what is a typical partnership split when this kind of arrangement is put together?"
50/50 is typical for fix-n-flip deals. For buy-and-hold deals, a lot less split to the sponsor...like 20% and 80% to the investor. If you shop the real estate crowdfunding sites, you will find the typical deal for a passive investor is an 8% preferred return paid quarterly, plus 50-80% of the equity. But that is for experienced sponsors. For someone with no experience, I would want a much higher preferred return, perhaps after the first year. Most importantly, I'd want to see someone on your team who has done this before.
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