I’ve written extensively on BiggerPockets about raising money from others to get started with investing in apartment buildings.
And others have written about creative financing to get into deals without any of your own money.
But then there’s the sticky issue of what to do about the deposit money and due diligence costs. No one really talks about these very real costs that require very real cash.
What do you do if you don’t have this kind of cash? Should you put your dreams of early retirement on hold?
Not having enough cash for the deposit and due diligence is definitely a challenge, but it does not need to be a showstopper. The key is to leverage your investors in ways that go beyond them just being an investor. If someone is willing to invest with you, there is already a certain amount of trust between you and that person. Otherwise they wouldn’t consider investing in one of your deals in the first place!
Your investors can help you in more ways than just putting money into an escrow account and getting equity in return. They can help you with the cash you might need BEFORE closing, too. Here are some tips for getting your investors to help you with both the security deposit and/or the due diligence costs.
How to Find Cash for Your Deposit & Due Diligence
Get the Earnest Money Deposit From Your Investors
Ask one of your investors to put up the security deposit. Address their questions and concerns. If the contract is worded correctly, there is nearly zero chance of losing that deposit:
- If you don’t like the property before the expiration of the due diligence period, you terminate the contract and get the deposit back.
- If you include a financing contingency and the property does not appraise AND your deposit “doesn’t go hard” after due diligence, then you get the deposit back.
- If you go to closing, then the security deposit will be repaid out of the proceeds of the purchase.
If necessary, you can offer your investor these added assurances and benefits:
- A promissory note with a personal guarantee.
- You could pay them something: perhaps some interest, a fee at closing, or a little bit of extra equity in the deal.
So now you have a game plan for the deposit, what about the costs during due diligence?
Find a Source of Funds for Due Diligence
No-money-down teachers talk about ways to get into a deal with creative financing. But they ignore the very real costs of doing due diligence. If you want to do a deal, you’re going to have hard costs BEFORE closing, such as a property inspection, cost of the appraisal, legal retainer to draft certain documents, etc.
If you don’t have the cash yourself, get it from one of your investors in the same way you got the security deposit. In fact, maybe it’s the same investor who helped you with that.
In this case, since the money is not being managed by an escrow agent and a contract, I suggest you try to estimate the amount money you need and deposit that amount into your business bank account and give your investor a personally-guaranteed promissory.
A word of caution: Unlike the earnest money deposit (which you get back if you decide not to close), once you spend money on due diligence, it’s spent. And if you don’t close on the deal, it’s gone — you’re never getting it back.
This is why it’s critical that you defer spending money AS LONG AS POSSIBLE and certainly only AFTER you’ve completed all items on your due diligence checklist that don’t cost money.
When you start spending money on due diligence, your confidence that you want to move forward with the deal should be fairly high.
On the other hand, just because you spent money doesn’t mean you should close on the deal just to get your due diligence expenses back!
Make sure your investor understands the risk and how you intend to manage that risk. The promissory note will help, of course, but you might want to offer a little bit more upside for the increased risk (an additional payment to the investor at closing or additional equity).
Not having your own capital to do apartment buildings deals is definitely a challenge, but it MUST NOT be a showstopper. The solution is to raise money from private individuals. And if you do, don’t forget to ask them to help with the earnest money deposit and due diligence costs if that’s what you need.
Do not use a lack of money as an excuse not to create wealth for you and your family. Get started NOW.
How have you used other people’s money in your real estate deals?