How to Purchase Apartment Buildings Without ANY of Your Own Money

23

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!

Related: Psst … The # 1 Secret to Raising Money to Invest in Apartment Buildings

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.

Related: The Checklist That Can Help You Save Big During Due Diligence

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).

Conclusion

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?

About Author

Michael Blank

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

23 Comments

  1. Daniel Ryu

    I like this and the link to the due diligence checklist! I need to check that article out again.

    I definitely want to move into the MF space so I make sure to read everything by you.

    Thanks for all the great info.

  2. Sharon Tzib

    Hey Michael! So what happens if you do get an investor to put up the money for due diligence items, and the deal doesn’t work out? Where do you get the money to pay him or her back (from your business bank account that you guaranteed with a prom note)? I still don’t understand from this post how one can do these kinds of deals with no money of their own.

    I know you say don’t start spending money on due diligence until you are fairly confident the deal is a good one (I assume from vetting the financials), but at some point, you will have to get an inspection and appraisal, and those folks will expect to be paid. Deals routinely fall apart from the results of those reports, and there’s really no way to know in advance what issues could crop up. So again, if that happens, how do you pay the investor back without using your own money?

    Please elaborate if you can. Thanks!

    • Joe Foster

      Sharon and Michael,
      I like the idea, it is creative to ask your private lenders to provide a loan for funds to perform the DD.

      As a private lender, I’m going to ask the same questions as Sharon, that is, if ya cannot afford to put up the funds for the DD how will you pay me back if the deal falls through? For that matter if ya got no cheddar, how ya paying my interest.

      Additionally, if the you are syndicating the deal and requesting equity for your sweat, which is completely appropriate, you are a partner in the deal. Details are missed and if the investors need to pony up more cash for the deal for …whatever, you are now an investor with no cash, how do you pony up? Do you loose your equity? If so, now you have no interest or incentive.

      Please don’t misunderstand, I think it’s a great idea and a good concept. As a private lender managing my cash, I would want assurances that limit my risk. I routinely provide financing for large residential rehabs, pushing $500K. These are % ARV based and I get first position. For new relationships, the borrower and spouse sign, no LLC, no company and both spouses provide personal guarantee.

      What private lenders out there have provided funds as Michael has suggested and what did you use to limit your risk?

      Joe

    • Michael Blank

      Sharon – I must admit getting an investor to put up money for due diligence is a much harder sell than helping out with the earnest money deposit. I’m not saying this is easy to do. And it requires considerable trust between you and the investor that (a) you’re doing what you can to research the deal before spending money and that (b) if you DON’T close on the deal, that you will somehow repay the investor (or make it up on the next deal). But it’s kind of like everything related to investing: it’s hard to find the deal and it’s hard to raise the money. Raising money to fund the due diligence is ALSO hard but it’s POSSIBLE. And most people wouldn’t have even considered it and therefore never get started. Hope that helps …

      • Michael Phillips

        Hey Michael! So what happens if you do get an investor to put up the money for due diligence items, and the deal doesn’t work out? Where do you get the money to pay him or her back (from your business bank account that you guaranteed with a prom note)? I still don’t understand from this post how one can do these kinds of deals with no money of their own.

        I know you say don’t start spending money on due diligence until you are fairly confident the deal is a good one (I assume from vetting the financials), but at some point, you will have to get an inspection and appraisal, and those folks will expect to be paid. Deals routinely fall apart from the results of those reports, and there’s really no way to know in advance what issues could crop up. So again, if that happens, how do you pay the investor back without using your own money?

  3. Antwan Miller

    Hey, Michael
    I love your due diligence checklist. This is great stuff.
    I have some question for you. What are you looking for when you purchase Apartment building?
    What is your process? I truly want to learn more on how to purchase Apartment complexes but I still need to learn the lingo.

    • Michael Blank

      Hi Antwan – I feel a bit overwhelmed by the questions and don’t know where to start. I suggest that you read some or ALL of my articles on Bigger Pockets … all of these together will surely answer many of your questions and get you started … hope that helps …!

  4. Joel Owens

    Could you do something like give that investor slightly more equity on the next deal when it closes??

    Example say for due diligence appraisal, inspection, phase one come to 6,500. Say the deal doesn’t close.

    The next deal you give that investor a credit with slightly more equity to compensate for the 6,500 lost on the last deal OR do you just chalk it up to a risk you knew they were taking??

    • Michael Blank

      Joel – that’s not a bad idea for what Sharon was saying. This gives the investor more upside in the deal, and if doesn’t work out, they get a little more upside still to make up for it. Thanks for suggesting …

  5. Jay C.

    These articles are all over Bigger Pockets. Honestly at the end of the day the big deal is risk and who is responsible for it. It doesn’t matter it is no money down. At the end of the day its your responsible for these loans—big loans and that’s all that matters. Why these more more more posters just don’t get this. Its no different then co-signing for loans. At the end of the day if mom and dad cosign for a car they are on the hook for it.

    In reading many articles on Bigger Pockets I wonder at times what the motive is. Are banks and lenders running this site with its constant message to borrow all you can? Many times its just not sound advice. I can see that a select few may make this deal work but it is a very small percentage. You also have a very small percentage that come from Vegas having taken some of the house money.

  6. Michael Blank

    WE HAVE OURSELVES A DISCUSSION! As Ben’s already discovered, the more people disagree with you the hotter the discussion! In these replies I see the concerns, objectives, the doubters, the naysayers. Using other people’s money is difficult but empowering. It opens a whole new world if you can acquire and master the skill.

    Is it darn hard to get someone to put up the money to pay for due diligence? What assurances and guarantees can you give? Not an easy question to answer.

    But we are entrepreneurs. And entrepreneurs don’t say NO, they ask “HOW CAN THIS BE DONE?”. They brainstorm, try one thing, and if it doesn’t work, they try another.

    As entrepreneurs we can never be successful when we say “IT’S IMPOSSIBLE” or “THIS WILL NEVER WORK”. We must ask instead “WHAT IS POSSIBLE?” and “HOW CAN WE MAKE THIS WORK?” ….

    • Joe Foster

      Michael and Ben,

      Ain’t disagreeing, so no discussion 😉

      As an active lender, I lend on reputation and collateral. I completely agree that it is not easy for RE Investors to get money while they have little or none of their money or property at risk, especially for a first deal. So we start off slow.

      I may consider financing due diligence for a seasoned, with me investor, depending on the deal. I’ll have your car/house/pizza-parlor as collateral.

      I’m glad that it is realized that it is “darn hard”. This is my point exactly and what is missing are the details., how about an example of what you have done that has been successful in the precise scenario?

      Also completely agree that “no is a non-starter”. We don’t say no, even as a lender if an investor comes to me with a deal and I don’t like it, generally we investigate other options together, perhaps finding a person to put up a smaller sum as a second, etc. An actual example, a lending partner was going to back out of a deal with an investor because the ARV did not support his funding model. We discussed between ourselves and then with the investor, he dropped what he needed and we did the deal, everybody wins.

      We are all just words on these forums, very few of us know who has what, who does what or more importantly who has experience and who is postulating. For all you know I’m a bum named Kevin that left society and hit the library interweb to harass bloggers on BiggerPockets. Or I could be “The Donald”, here to give my advice on REI and hair styling

      Joe

  7. Kirk Thomas

    Raising capital has a proper way and regulated way to do it. Usually refered to as syndicating. The professional and correct way to approach and pitch investors. Yes, it is a formal method but will get the most respect and trust from the money people as well as staying out of trouble with the SEC.
    “Details, details,details”.
    Firstly, there needs to be a PPM in place for your LLC, which is drawn up by a securities attorney. A cost to the buyer of about $3k-$5 as a one time expense for for this. Without going into detail of this complex procedure. The PPM is then given to any prospective investor(s) and should state in the verbage the fees and expenses to the investors. Perhaps some entry and non refundable acquisition fees.
    Talk to your attorney about verbage stating guarentees. In cases such as “rates of returns” it can be illegal to offer a set percentage in raising money, formal or not. A PPM is going to help you understand your investors as well.
    On the other side, any capital backer whom has purchased real estate himself already knows about these hard costs and shouldn’t expect them back if the deal falls out. They will pay these fees regardless whether they buy on ther own behalf or into a investment group. If a buyer has any doubts as to acquisition before getting to these hard cost expenditures, they should probably not take down that property and go onto something else.

    • Michael Blank

      Kirk is correct … there are security law considerations, so you need to check with your attorney before taking other people’s money. I have written extensively on this topic as well, but only have so many characters per post. I could have mentioned it though — thanks for pointing that out Kirk.

  8. Sandra Han

    Hey Michael,

    I really like what you arote in the first chapter of your ebook, especially this part…

    <<>>

    My question is, if my investors finance 100% of the deal, what do get? Just a wholesaler finder fee? If not, could you please give an example or two what should my share be if my investors finance 100% of the deal, thanks!

    • Michael Blank

      Hi Sandra … the syndicator (i.e. you) typically gets between 10% – 30% equity for putting the deal together, depending on the size of the deal, how good the deal is, and your investors. You get that NOT for putting in your own money but for finding the deal, raising the money, managing it, and finally selling or refinancing it. If you put your own money into the deal as well, you get an equity share like your other investors do. You therefore play two roles in the deal: (1) syndicator and (2) investor. Hope that helps!

  9. Ayodeji Kuponiyi

    Great post Michael, I feel like the best way to track money from potential investors Is to have something as small as a duplex or triplex maybe even a fourplex for investors to see that you have already started investing. House hacking will be a good way to start and then from there someone can going on into getting the small apartment . By having this and showing good cash flow, I believe potential investors will be more than willing to fork over their hard earned money as opposed to someone without a track record.

  10. Roger Vierra, Jr.

    It is best to look at this from both the Borrower and the Lender’s POV. In theory- this is an exciting thought, however, how does this hold up in real application? I am both a real estate investor and financial intermediary. When it comes to CRE, one cannot compare this type of investing to SFR investing- or even duplex investing. It’s like comparing apples to oranges. These are two totally different animals, and so the creative techniques are different. OPM is harder to come by, unless…you can prove through your financial due diligence, that you have a “diamond”. There are more people out there looking for a great return on their money than what the banks are currently offering. Knowing this opens the doors for us to present the offers by pitching them professionally and legally. Some have become so desperate to recoup losses from their 401K’s, many have reserved to gambling in casinos, knowing the house wins 95% of the time. They know they could lose their money (and most likely do), yet they are looking for their “big break”, so why not offer them the opportunity to invest in you and your LLC or Fund? I am constantly learning and reading blogs and articles to “sharpen my sword”, and without a doubt, theories are plentiful– even on here. However, if you have the raw guts and audacity to try these suggestions, then you will come across ideas that will become your reality. Michael- Have you used these techniques yourself in your own CRE business? If so, how many properties did you use these techniques to obtain? Is this a common strategy, or in all truthfulness, just a theory that hasn’t been personally tested, tried and proven? Can we honestly trust you?

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php