4 Alternative Methods to Finance Your Apartment Investment

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With the record amount of residential foreclosures in recent years, there poses a great opportunity to profit from rental housing by investing in Apartment Buildings. However, even if you recognize this opportunity, you must know how to go about financing any potential apartment investment that you come across.

In today’s turbulent economy the best real estate opportunities will be awarded to the investors who have access to capital. It is not enough to rely strictly on traditional financing or hard money lenders to finance your apartment deals.

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Here are 4 Alternative Methods to Finance Your Apartment Investments

1.) Finance Companies – Joint Ventures are an excellent method for financing apartment deals or any commercial real estate for that matter. One of the best methods for finding joint venture partners is to seek out finance companies that not only offer traditional mortgages, but also joint venture with real estate investors on projects that make sense.

A great resource to find these finance companies is through the Scotsman Guide. The Scotsman Guide is the leading trade magazine for mortgage originators. You can go to their website and search for lenders who specialize in commercial real estate and more specifically multi-family properties. You can search for lenders through their lender “matrix” and you will instantly have access to lenders who provide commercial financing. You will also be able to see which lenders accept joint venture proposals, what part of the country they specialize in, and their minimum and maximum loan amounts.

Once you gather this information, the next step is to contact them and see what their procedure is in regards to accepting joint venture proposals. You can also take it a step further and see if you can connect with a decision maker through social media sites such as LinkedIn, Facebook, Twitter, etc. Now you will have to bring some money to the table and you typically will have to pay for all of the upfront due diligence fees before they give you a financing commitment, but for what it’s worth, you now have another potential source of funding for your commercial real estate deals.

2.) Small Private Equity Firms – Small private equity firms are also a good source for financing for your apartment investments. The keyword here is “small”! Many private equity firms will only consider funding your project if it is $50 million or higher, but there are funding opportunities and joint venture opportunities with smaller private equity firms.

The private equity market is vast and sometimes it can be difficult to find a firm that specializes in the type of deal that you are interested in acquiring. Every firm has their own criteria in terms of property criteria, loan amounts, demographics, risk tolerance, return of investment (ROI), etc. Finding a firm that is a good fit for you will take some time, so you should get started early and work hard to develop meaning relationships that can benefit you in the future.

The best way to find potential private equity firms is to totally immerse yourself in the world of private equity. You should constantly be on the lookout for Private Equity blogs, magazines, and trade associations.

3.) Registered Investment Advisors – Investment Advisors provide an additional way to get your deals funded. Investment Advisors generally manage the assets of high net-worth individuals and institutional investors. These advisors are responsible for analyzing and recommending suitable investments for their clients. Every advisor or advisory firm has their own criteria in terms of the investments in which they specialize. Most firms specialize in the equities market, but there are numerous firms that specialize strictly in real estate and other alternative asset classes.

Registered advisors typically overlap with the private equity market, so you will probably come across advisory firms in your search for private equity firms. However, a quick Google search will allow you to find firms that specialize in real estate. Simply Google “real estate” AND “register investment advisor” OR “investment advisor” OR “wealth management”, etc. By conducting this search regularly and scouring the web for advisory blogs and trade magazine, you are destine to find a variety of advisors who specialize in real estate. Contact them and see what their procedure for acquiring real estate.

4.) Private Real Estate Investment Firms – Private real estate firms is a broad term for any person or company that invests in commercial real estate. These companies might be traditional development companies or simply a group of private investors who invest in real estate in their spare time. It is your job to see them out and contact them to see if they are actively seeking new projects, and if so, find out the criteria of what they are looking to purchase and find out if they joint venture with other investment firms.

You can find these companies with a simple Google search of “private real estate investment firm”. Once you begin to navigate these company’s websites you will begin to see similar industry jargon such as: “asset management”, wealth management”, etc. Conduct additional search using this specific jargon and “real estate” and you will find an abundance of companies that are actively looking for deals and joint venture opportunities.

In the general scheme of things all four of alternative financing sources above fall into the “private equity” realm. In order to compete in the current market you must have access to private capital either directly through your own private investors or indirectly through the sources above.

Hopefully, this article was helpful and provided you with more insight on additional methods to finance your deals. If you have any questions, we can carry the conversation over into the comments below so please let me know your thoughts and comment below.

Comments are always welcomed and encouraged! Let me know your thoughts below in the comment section and please share this post.

Photo: Nessachan

About Author

Khary Reynolds is a real estate investor and freelance copywriter with more than 10 years of experience in developing content for savvy real estate investors and executives that will build trust and credibility within their marketplace and aggressively grow their sales and profitability.

13 Comments

  1. I will try all four recommendations you mentioned above. I have been trying to buy an
    apartment complex since 2008, with no luck on getting financing. I see so many great deals, but I have to let them go.
    Keep up the good work.

    • Khary Reynolds on

      Thanks for the comment Dwayne. Traditional financing is tough right now so you have to force yourself to move toward private equity in some shape or form. It can be a slow process to build up trust and credibility with potential sources so the best time to act is now. If you stick with it you will begin to see the fruits of your labor.

  2. Guillermo Campos on

    Thats is great advice. The comment came right at the time I needed it. I have been buying homes the past year and renting them to nice families and doing a great business. I see a lot of opportunity but am starting to run out of money. This article could get me started in this arena. I wanted to ask a follow up question. A couple of friends have approached me and said they want to make their 401(k) funds available to me to invest. Would I have to set up a REIT and then have them transfer their funds? I see this is a potential huge mine for private investing that I could tap. I am also a lawyer and thought I could probably set this up, but not sure where to start to get this REIT ready to accept funds. Any ideas?

    • Guillermo, I was in the exact same scenario as you.

      I just had them transfer their 401(k) into a self-directed IRA. Just do a google search for self directed IRA and you’ll come across a few companies. I don’t know if I can recommend on biggerpockets or not, but I used the Entrust Group. The great thing is that for the couple, they will be able to invest directly out of their self-directed IRA and have TAX-FREE earnings on their returns! And the good thing for you is that you don’t have to deal with any legal costs/hassles of setting up a complex entity.

      If you’ve got any questions, feel free to email me, just look at my signature (daniel at surestonecapital dot com).

    • Khary Reynolds on

      Thanks for the comment Guillermo & Daniel. In terms of your friends investing with you with their 401K’s, Daniel is right, they would have to transfer them into self-directed IRA. If their 401k is from a previous employer, then it should be an easy transfer. If the 401k is with their current employer, then they will have to check to see how much of their 401k they can transfer to a self-directed IRA (if any at all).

      Once the the funds have been transferred to a self-directed IRA, you don’t necessarily have to structure the investment as a REIT. If you bringing in equity investors, you could structure each deal as a LLC or LP agreement and have the direct funds from the IRA directly to the LLC or LP. If you are looking for strictly debt investors, they could transfer funds directly to the escrow agent and get a first mortgage on the property and the IRA would collect interest payments. Or, some combination of the two.

      The first thing is to see how much of their current 401k can be transferred to a self-directed IRA. From there I would check out several self directed IRA companies and see which one of them offer “Checkbook” self-directed IRA’s.

      As Daniel suggested, I have heard good things about Entrust Group. I have also included some additional companies below:

      Equity Trust Company – http://www.trustetc.com/
      Guidant Financial – http://www.guidantfinancial.com/
      Pensco Trust Company – http://www.penscotrust.com/

      Check them out, and best of luck to you. Hope this helps.

  3. Wow, Khari, reading your posts are like a breathe of fresh air. I will definitely be looking for more. Guillermo & Daniel should benefit immensely from your help. Although I have not done it myself yet, you have them on the right path for sure.
    Thank you very much for sharing.

  4. The small private equity firms caught my attention the most. I agree that most equity firms will only be helpful if they are on a project of about $50 million and up. However, I do believe there are many others easily failing that $50 million mark, and these same consumers comprise the majority of homeowners, property owners, etc.
    This information is definitely worth keeping. Who knows, we might be in a situation where we will need some financing in the future that does not go over $50 million. Then we would know we can still go to small private equity firms for assistance.

  5. We are a small private equity real estate investment firm that have been putting together high yield returns for all types of investors. I think this is a great article so that everyday investors are aware of the options made available to them.

    edited by admin to remove solicitation

  6. Yes, private equity funds, hedge funds are the way to go when convention lending appears to be slowed down. Even though major banks aren’t lending as they were few years back, there are still healthy banks available in market that are still lending in current economic slump. Your financing request must set itself apart from others to be a winner. The key is to work with investment advisor that can get you (borrower) in touch with right lender/funding source to get financing for new purchase or refinancing your existing assets. Remember, it is very unlikely to to cash-out refinancing unless you have owned the property for more than 2 years when applying for a refi.

  7. Scottsman Guide is not a great resource to find lenders. You have to have a good background and industry experience to differentiate between the lenders and phonies. I am a commercial mortgage broker and about 20 of the people who advertise themselves as lenders in Scottman Guide simply call me when they get an inquiry. Unfortunately they represent themselves as lenders and the borrowers are always surprised when I tell them on my first phone call with them that I am a broker and that the person they contacted through Scottsman is also a broker, but without any decent lender relationships.

    Finding debt and equity for apartment acquisitions today is not all that difficult. We would be happy to help anyone looking at opportunities. In the past 6 months we have closed 8 apartment financing transactions. Currently we have one that is being acquired that is 35% occupied and we are doing that with a soft money lender. Soft money is a term I coined. Its a hard money lender with rates a little cheaper than most of the hard money lenders.

    For more stabilized properties, a borrower can get a 10 year fixed rate loan for 4.5%, or a 5 year fixed rate loan as low as 3.5%. There is alot of apartment financing available today and its more a matter of talking to the right type of lender that fits for the transaction.

    • Anonymous–That’s great advice. Could you please provide a website so I can contact you? I’d like to learn more about your lending criteria. I’m in the market and looking for financing.

      Thanks

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