Learning to Fund Your First Deal

As anyone who has seen basic real estate financials could tell, costs involved with investing in real estate will get expensive quite quickly. Money will be needed for the downpayment along with other fees and reserve accounts. In order to save some money it will be important to find the correct lender to fund your deal. For that reason, I will first discuss the options for financing through different lenders, next will be a deep dive into downpayment strategies and finally I will introduce another option to it all.

When financing your property, it is common to go through three different lenders. First off there are local lenders, then national lenders, and finally conduit lenders. It is important to know that each has there own strength and there is no best option for every deal.

LOCAL LENDERS

Local lenders like to deal with local investors and are aware of current market conditions. They know the competitors and opportunistic properties in that market. The importance of the lenders having this insight is that they will be able to get things done quickly for you if needed. If you're looking to invest in your own market, a good way to establish a relationship with the local bank is by opening an account with them for the property you are buying. Keep in mind that local lenders like to amortize over a shorter period which means you can pay down your principle quicker but also might make it difficult to afford the monthly debt service.

NATIONAL LENDERS

National lenders are always getting involved with new loans then eventually sell them off to a secondary market such as Freddie Mac or Fannie Mae to reduce their outstanding loans. Since they are selling loans to other markets they must conform to what these other markets are looking to buy. What does this mean for you as a borrower? Well, these lenders are looking for specific criteria such as occupancy at 85% or better for a trailing 6 and DCR at 1.25x or better. Secondary markets take the safer route therefore don’t like to take on loans with properties needing many repairs. Nor do they want sketchy financials (missing info in the accounting books) or they might want more money upfront to account for the risk.

CONDUITS/ CMBS

Although conduits are very similar to National Lenders, they do have some differences. When conduits are ready to sell their loans, they package them towards anyone willing to purchase them such as large investors and pension funds. What does this mean for you? Well, this means that their guidelines will not be as strict as a national lenders guideline when getting into a loan (conduits are fine with T-3 financials opposed to T-6 and may accept deals with mediocre accounting records.) Although this is good for you, they will minimize their risk by charging higher rates than National Lenders.

DOWNPAYMENT MONEY

Now you know how to save some money by choosing the right lender for your situation, but what about the upfront cash you will need. When it comes to money up front, as an investor you will be responsible for the downpayment along with some fees and reserve accounts that come with the duty. A helpful strategy to use in order to have the upfront cash is by raising it through friends and family and giving them a return of your profits from the investment. This will allow you fund multiple deals without using much of your own capital. Although there are many pros to this strategy, you should be aware of downside. If you are not a seasoned investor or not confident that you can get a healthy return on your investment, there is possibility you will not be able to pay back your friends and family. This will not only have you embarrassed but it could jeopardize your closest relationships as well.

STILL WORRIED ABOUT LOSING YOUR MONEY?

If you are still worried that you do not have the proper skills to invest in real estate, a good way to gain some experience would be to invest your money in a real estate fund or syndication. When you invest your money using these instruments, you will be able to ask the sponsor how they plan to invest your money. By learning investment strategies through these professionals and seeing how the process is run from the acquisition stage until the disposal of a property you will gain insight that might just give you the last boost you may have needed. A good way to find a reliable sponsor is by getting a referral through your network. If someone in your network that you trust has invested with a sponsor, it may be worth your while to invest with them. However don’t just take their word, make sure you still do proper due diligence on that sponsor to assure it is the correct financial decision for you.