It’s a common fallacy that you need large amounts of money to get started in real estate. Sure, if you’re doing bigger deals, you need larger sums of cash, but buying real estate with no skin in the game is a fairly common real estate investment structure. For years, that’s what the big billionaire developers did. In fact, one BiggerPockets investor seems to scoff at the notion that he should have any skin in the game at all!
Be that as it may, the reality is there’s plenty of money out there just looking for opportunity. And if you have the right deal, the money will listen. So, if you’re a new investor—or even a seasoned one—here are four sources to fund your first (or next) deal.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
1. Private Investors/High Net Worth Individuals
You’d be surprised who’s down to invest.
A while ago, I spoke to New York Times bestseller Neil Patel, a prominent tech entrepreneur and digital marketing mastermind who’s built a series of businesses, including recognition as “a top 100 entrepreneur under the age of 30” by President Obama.
Related: How I Find Private Money Lenders to 100% Fund My Deals (& How You Can, Too)
Despite earning his stripes as a rockstar tech guy (check out his stuff here—it’s pretty dope), Neil’s super involved on the investment end. “I got involved with real estate because I was looking for places to find money,” Patel told me.
His first deal was a 296-unit mismanaged multifamily complex in Vancouver, WA with 30% vacancy.
“A distressed asset. They couldn’t figure out how to make it work. [We] put down $6 million, $20 million from the bank,” Patel said. “Three, four years later, we pretty much doubled our money.”
A great way to attract the capital is to basically show the person with the money how said money will help them make more money—all the while making sure they won’t lose it.
“A football player came to me and said, ‘I want to do a real estate deal, I’ll give you 8% on your money,’ which is a good deal—I’ll take 8% all day long,” Neil said, assuming the borrower has assets to collateralize. “How much do you need?”
Moral of that story: People with capital to deploy are always looking for deals.
To show the feasibility—i.e. how they will 1) not lose money, then 2) make money—I personally use a software that analyzes the deal, runs the numbers, spits out a pretty three-page report with graphics, risk, upside and so on, which makes it easy to present the highlights of the deal. (Shoot me a private message if you want a copy.)
In fact, if I’m shopping for financing on the private market, I totally bypass the standard forms and just use those reports. It takes me five minutes and makes their job easier, too.
2. Investment Clubs
Similar to a fund, an investment club is loosely defined as “a group of individuals who meet for the purpose of pooling money and investing.”
So how do you find ’em? A quick Google search will yield results. Here’s what Investopedia says:
By law, investment clubs are not allowed to recruit members because it could be viewed as part of an investment scheme. This means that the onus is on you to approach a club.
BetterInvesting, formerly known as the National Association of Investors Corporation, is the pre-eminent advocate of collaborative investing. It maintains extensive archives of information for starting and maintaining investment clubs.
Notice it said that the onus is on you to approach them, whether it’s for the purpose of joining or pitching. Again, these groups are looking for deals.
What GPs/sponsors typically do is put together memoranda highlighting the deal, the financials, the capital requirements, and what the terms are. Here’s one from Avistone, a California-based landlord with 1.5 million square feet under operation.
Avistone’s PDF is actually pretty neat. But the thing I’ve learned is that most of these tools come from the old school, which means any ignorance can work in your favor. Private placement memoranda are horrifically archaic. I mean, look at this.
Sure, for a big fund or projects, you definitely need it, for the legal reasons more than anything. (And the lawyers love it because only they can decipher so it greases their wheels.)
What works for me? I cut through the jargon and boilerplate, get to the point quickly, and have some visuals to come along with it—not unlike how tech companies pitch their startups. Concision counts.
3. Syndication/Pooled Funds
Similar to the idea above, you simply pool the money yourself and go for the deals. And there are tons of ways you can do it, some more complex than others. (I personally love simplicity in my deals.)
The process of assembling the money is similar to the one described above, except you now become the entity that wields the muscle, depending on the size of endowment, of course.
My first investment vehicle was raised through a mix of #1 and #2, namely private investors and a big family office. Naturally, the terms are more restricted in that sense. I recently raised an opportunistic fund using this strategy outlined here.
What it did for me was grant me freedom to aggressively pursue more deals with far greater flexibility. But if you’re just starting out, it could be something as simple as a tenant-in-commons situation or a group coming together here on BiggerPockets, which happens all the time.
Or even Meetups and coworkers. Example that happened just yesterday: I’m knee-deep in two developments at the moment, but was sent a tremendous off-market deal in Jersey City, $250k for a two-family that just hit.
So, what I did was send it around to a few people who could be interested, and in a matter of minutes, the equity was pooled (from a lawyer and consultant) and I’m helping the group make a bid.
See how easy that was?
4. Boutique Accounting Firms
I was actually surprised this was an option, but really shouldn’t have been. If you’re raising a fund, you’re limited to accredited investors (although regulations have loosened in recent years; read more here)—and that lowers your talent pool dramatically.
However, smaller accounting firms have lots of non-rich with decent net worths, in the mid-six figure range. Not quite millionaires, but more than enough to add real estate to the portfolio. And with it being a smaller company, the CPAs may have a more informal relationship with their clients.
Again, here a great presentation comes in super handy, especially because they may not be hardcore real estate folks. So they often want the numbers simplified.
True story: A guy who owns two blocks in prime Bedstuy, Brooklyn heads one of those groups with big signs that go “WE BUY HOUSES CASH! QUICK CLOSING!”
I went to the guy with a deal we were looking at, complete with a report that laid out all sorts of stuff. Equity multiples. Unlevered vs. levered cash flows. Exit projections. Three-year IRR, five-year IRR, waterfall distribution, the next lunar eclipse—you name it, it was there.
“We don’t care about that,” the guy said. “Just tell me what the [money]in and out is and what period of time we’re looking at.”
And more often than not, that actually gets the deal done.
Featured Photo Credit: Mugabe Woodside, @baswoods.
Readers, what are some non-hard money sources you’ve gone to to raise capital quickly?
Please share below.