Attorney · Littleton, CO · Member since 2015 · 28 posts · 13 votes
I'm going through a career transition at the moment. I've been working as an accountant for seven years but I'm a licensed attorney. I've begun my own law firm in the last few months. As the reader will imagine, I can't show stable income. My law school loans push my debt to income ratio into unfavorable territory for traditional lenders. I want to get started finding properties to rent but I wonder if right now is the best time for that. So here's a hypothetical scenario.
Suppose I find a property that would be a great rental property. I would plan to talk to private money investors to go in on the property. However, I envision the following problems:
If I find a private money investor, what is in the deal for me? I don't have a lot of money to put into the investment, what cut would the investor be willing to part with?
How long does the private investor want to stay in the investment? If the investor wants to get out in 6 months, I don't think a bank would be willing to do a refi because of my debt to income situation.
Is now the right time to try and find a rental or should I focus on establishing the law firm and paying down debt and get an education so that when I'm ready, my finances are in order?
If the investor isn't going to be involved in the day-to-day management and operation of the rental and you will be, then this is what you bring to the table. Will this be a 50/50 deal? no, but a piece of the pie is better than starving. You bring value when you a providing service to the operation. If your plan was to pay for property management, then I would somewhat agree that there's little value in you being in the deal aside from finding the property. Still, someone needs to source the property and look after the management company. It's worth something at the end of the day.
I hear what you're saying in so many ways. So, a question for you: what's your local market like? Does it lean towards flipping or buy and hold? Can you find and buy rentals that will cash flow?
I can tell you from my lurkings about here that investors/lenders are probably not going to want to loan you money for a very long time. And by a long time I mean more than one year. My research shows lenders working in the 3 to 12 month range (I could be wrong, but that's what I've seen.) Are you going to be able to raise the cash to pay off the lender in one year? If not, then you might have an uphill lender search. I know that some (many?) investors find success by flipping properties to build a cash reserve that they then use to purchase buy and hold properties. {I'm considering such a plan now for my own business.}
Another question for you: have you gone to a traditional lender and tried to get a loan? I carry a really hight debt to income ratio myself (student loans!! argh!!) but they didn't stop me from buying my duplex. Find yourself a good mortgage lender and they'll be able to make it happen for you. I went with an FHA loan and was still able to get a loan. I used some 401k funds for my down payment, but I was still able to make it happen with my hight debt to income ratio. And well.. if your lender can't make it work because you need a longer job history... well... then work your dayjob, and in the meantime keep looking for deals, keep analyzing, and learn your local market, so when the time comes to make an offer you can do it with market knowledge.
I think you are asking the right questions. Most people when they first start out get private money from friends and family. Without a history of successful deals, it is difficult if not impossible getting a random investor to part their money with you.
I can only give you from my perspective in what I look for as an example (I am a passive/money investor).
- Syndicator always needs to have some capital at play. I tend not to invest if the syndicator only has "sweat equity".
- My investment capital is protected 1st. So assume I invest $500K in a $1MM syndication. If the value drops to $800K, I still get my $500K back.
- Cash flow is paid out first to investor. I see a lot of deals that the syndicator takes guaranteed cash flow for the "work" or "management". If that is the case, than I'm the employer, not an investor and I'm paying someone's salary. Syndicator gets paid on the upside. So if projected cash flow is 7%, the 7% is paid to the investors. But if syndicator value adds and improves cash flow to 10%, then they get 50% of the upside.
- Investment time frame is 3 years or less.
Just know, having loans complicates the deal greatly. Most of your small investment properties are financed by banks, and they require any significant equity holder or partner to be a guarantor on the loan. Your investors probably wouldn't be willing to do that. They are risking their investment capital, but they don't want to go further into debt. So if you see a $1MM property, and you are thinking you can get a $750K loan and get private money for $250K, you probably will fail, as no investor is willing to take the risk signing for the loan. If they were, they wouldn't be the passive investor. Instead, they would buy the property with the loan, and then hire you as a the property management for a fee.
(obviously other investors will have different criteria)
These comments have provided me some valuable questions to ask and also some insight into the investor's way of thinking. To be frank, I don't trust myself enough to make real estate investing a full time pursuit at the moment. My education is in law, tax, and accounting and I expect it to be valuable as I move into investing. My professional career has been tax compliance so far and I want to get established and confident in taking on legal issues more than I have done so far. I planned to use this time of a hot market in Denver to get to know the market and make a habit of analyzing properties. I believe I can find the occasional one-off deal and get money (some of my own and some investor) to make it happen. I think, especially after these comments, that I don't bring enough to the table to make it full time with investor money. I'm satisfied with that conclusion. I'll be working over the next six to nine months to find opportunities and get established in my day job.
@Carl Miller if you find a good enough deal, you can get a hard money loan to purchase it. Hold it and collect rents for a year and then refi with a commercial loan from a local bank. Commercial loans don't look as much at the borrower as the property. You should take a read of @Brandon Turner's "Book on investing in real estate with low and no money down". Also start networking at the local meetups and you might be surprised what comes your way.
When you lack funds of your own, attempting PML + a 1st TD from a bank is pure fiction, so don't waste good time going down that road. The type of investment will control the time period.
For example,
Buy right, rehab and flip can be a short term hold and the PML could JV with your sweat efforts (including using contractors) to get the property on the market at FMV in a matter of a few months. Replicate this N times and you'll be ready for a Buy&Hold strategy.
B&H on an affordable SFR, managed for 2 years and you might be ready for a 1031 exchange into an MFU 5+ commercial product.
I agree with your sentiment. It's extremely hard to know where and how to focus particularly if you have a passion for real estate.
One thing I have definitely noticed: If you want people to tell you to pursue real estate, ask people on a real estate forum. If you want people to tell you to pursue your law business, ask a lawyer.
The can-do mentality is very strong in real estate, and for good reason. I have seen and heard of regular people all over this forum do amazing things. Despite that, you have a limited stack of chips to play, and it's important to deploy them strategically instead of betting on every hand and getting killed by the blinds.
I've mentioned it before, and @Brandon Turner often does as well. The One Thing by Gary Keller and Jay Papasan is a great read for pushing focus and narrowing down your goals.
I am also a partner in a small tech firm. The money I make in that business eventually goes to other people so they can manage real estate via syndications or partnership deals. Here comes the kicker, the flipper-wholesale crowd says: "Well, you could've done better numbers if you just scoured for the right deal in X neighborhood, self-managed, and did the rehab with your own team." This is completely true, but my total return includes all the time I spent at my job, not managing a rehab. My total return is assuredly better.
The first question you obviously have to answer is: "Do I like my occupation?" If you're building a law firm, I am going to assume that is the case. If it is, then make it your one thing. There have been more than a handful of occasions I wished I was a lawyer, just so I could write my own contracts and do closings.
And now, the part where I turn my aforementioned suggestion on its head.
While I think you are best served by outsourcing a lot of your investment to partners with more time on hand. I do think you will need at least one deal under your belt before potential partners will take you seriously.
Since you're low on funds, and working to pay down debt, I would suggest leveraging your law skills to take a piece of a deal (in exchange, legal services). If they're worried about your experience or it's not a great fit, then consider the standard approach: live below your means, put away something each month for investment, be ready to deploy when you've achieved the target.
Now realizing this is getting long, but it's helping me fight my insomnia. Best of luck. Do reach out if you need anything.