Real Deal REInvestor Network

Check out our blog post here
http://www.nreiselitepartner.com/blog/2011/01/17/Basic-Supply-and-Demand-When-it-Comes-to-Multifamily.aspx?trackback=1

Tenants as Partners
Now you’ve learned how a stable an investment when the seller becomes a partner in your commercial property deal. Tenants are the next best kind of investor to have, because they help qualify the deal due to owner-occupant status which reduces the vacancy risk.
When tenants become your partners, they have a vested interest in the property. They’re not as likely to move, because they have a stake in the deal and risk that stake if they move out.
For instance, suppose you have a tenant in your property for half the space, and he’s a 50% owner in the deal. You can go to the bank and show them that your Pro Forma projects a 3.5% vacancy.  Even if the ordinary vacancy rate for that area is 7%, they’ll quickly see this as a viable deal.
Dealing with a tenant, rather than a partner, may mean that you must raise more money.
However, very often that isn’t true, because with a tenant you can qualify for a higher loan- to-value.

Contractors as Partners
Some deals involve a tenant and a construction company. You might be able to form a deal without putting in any money at all. When renovation is involved, it’s handy to have a construction company partner to immediately take care of those issues.
If you hit the real estate cycle at a time when there’s not a lot of construction going on, you can more easily find and negotiate with construction companies. They may be hard pressed to find whatever jobs they can, so that they don’t have to lay off their key workers.
Tip: If you don’t have any construction background, be sure to get at least three bids on your jobs.

Financing Equity (Sellers as Partners)
The reason a seller will stay in your deal is because this is a deal that they already know and like—it’s a deal they already bought. They own it already; so they know it’s a good deal and you don’t have to convince them of that. Treating Capital Gain If a seller who currently owns the property has to be convinced that this is a good deal, then you missed something.
It helps to reduce or even eliminate capital gain when the seller stays in the deal because when you contribute equity to a partnership, that entity will own a piece of real estate.
That’s a nontaxable event—not a swap or a 1031. It’s allowed by a Section 541, IRS code, and it says, “When you make a contribution of a property to a partnership in return for an interest in that partnership, that is a non taxable event.”
You literally pay no tax on the money in the deal. If you take cash out of the equity contribution, that cash is taxable. For instance, if the ‘Me and You’ LLC is going to own some property together, so you contribute half your equity to the partnership. The other half you are receiving in cash is considered by the IRS as taxable capital gains.
Even though this is not an installment sale, the tax is figured on your half exactly the same way as it’s figured on an installment. The first payment you receive from an installment sale is taxable, but the dividends you receive from that point on are not. They are ordinary income or dividend income. Then sometime later, when you sell this property again, you will accrue another capital gain for that half of the deal.
So, you’ll receive a large portion now and more income over the years, while acquiring the remainder later. However, when you initially contribute your equity to that partnership, it’s not as if you sold the deal and paid half of it back. The half you are leaving in the deal is not taxable.

Equity vs. Debt
Financing commercial deals, as with financing any other kind of deal, is always a combination of equity and debt, with equity being the primary ingredient.  It may be not be necessary to have a loan, if you and your partners can handle the whole deal with cash, however most of the time; you’re going have a combination of debt and equity.
The cash flow isn’t better just because you don’t have debt in the deal. It’s just that more of the cash flow goes to service debt if you’re more highly levered.
Equity vs. Debt Ratio
So, if you’re sponsoring a deal, it would be smart for you to recruit as much equity as possible and have no or very little debt in the deal. However, even if you have about 50-50 debt vs. equity it will usually be a very workable deal. This presumes that you are borrowing money at a rate less than the overall rate on the property, so you have positive leverage.
If you borrow money at 6% on a property that’s throwing off income at 10%, you have 4% left over. That money goes to your partners. The concept is to use other people’s money (OPM), which gives you leverage on your money.
Remember there is an extra benefit from the fact that you’re borrowing some of the money at a rate lower than the overall rate in the deal.
Tip: After awhile in this business, if you sign on a lot of debt, you are much more powerful than the bank.
So, with equity or debt, you should always be raising money from other people. You’ll even get repeat customers—people who have participated in your deals and want to deal with you again.
Raising Equity
You raise equity from the following groups in this order:
1. Sellers
2. Tenants
3. Other people (partners)
Raising Debt
You raise debt from the following groups in this order:
1. Sellers
2. Banks
3. Finance Companies
4. Individuals
Tip: You don’t really raise debt from mortgage brokers, but they can steer you to individuals with equity money.

Whether you have lots of money and great credit starting out, or no money and lousy credit starting out, either way, if you truly want to make a serious bid at building a property empire then you cannot discount the importance of learning how to find investor partners and equally how to find private lenders to help fund your real estate investing. As you go along in your real estate investing career, as long as you pay attention and get educated about real estate investing, you will find that the skill you possess in spotting value and valuable money-making opportunities in real estate will far, Far, FAR surpass your ability to get all the money you need to do all these many deals you come across- UNLESS...

You learn how to find investor partners and find private lenders and get your money sources in place AS YOU GO ALONG and BEFORE YOU NEED THEM.

How to Find Investor Partners and Private Lenders

Creative investing techniques aside, sometimes you need real cold cash to do a deal. And sometimes it can be very frustrating not to have it to hand. For that reason, available financing money tends to be the biggest challenge for many real estate investors, new and experienced both. If you can't get the financing, sometimes there's just no deal.

John Wooden once said "Don't let what you can't do stop you from doing what you CAN do". Keep that in mind now as I lay out what you should do, if for example you do have little money or a poor credit situation. And if you don't then you'll still find more access to money than you might have ever though you needed (yet) when you apply these strategies.

Now, I speak from experience (big time!) when I say that lack of money and/or a negative credit situation can be one HECK of a hurdle to leap over but with enough tenacity and creativity and faith you will do it.

Before you get all disappointed that I'm not saying it's easy, I want you to consider a paradigm shift in your thinking. Today, I want you to see that it's not easy but it IS simple. I want you to consider that being credit challenged is not all a negative. I want you to believe that this "negative" situation can have a powerfully positive silver lining, and that's this:

"As long as I KNOW I'm going to make it happen (a deal, this business, whatever), whatever holds me back (poor credit and/or no money) is immaterial to accomplishing my goals. In fact, I am BLESSED to have this challenge (poor credit and/or no money) because since I KNOW I will succeed that means I will have successfully defeated this challenge and developed skills and attributes (patience, tenacity, faith, creativity) that will take me far FURTHER than someone for whom this (credit/money) was not a problem. Nor will I, when I have bested this challenge (poor credit and/or no money) ever take what I have gained (good credit, wealth, financial independence) for granted and lose it-- as some who never face challenges do."

Believe that and you cannot fail.

Now, as for the steps to help you right now getting your money sources in place to do even more real estate deals, let's talk about finding investor partners and private lenders for real estate investing.

Here are a few strategies many people can do immediately, and others as soon as is feasible with their time and money availability. If you do these concurrently, and CONSISTENTLY, in less than a few years you can have access to more money to do deals than you might imagine:

1) Go to the Courthouse and look up mortgage documents. Go regularly because you're researching. Creating the database that will get you paid. Ask around, these people (civil servants) can be extremely helpful if you are humble in your requests. Just don't expect to discuss real estate investing with them, they likely don't care. What are you looking for? You are looking for the mortgage lienholder. Take a tablet of paper with you and write down any (including mailing address) INDIVIDUAL (i.e. non- Wachovia, First Century Financial, Bank of America bank/finance institutions) names you find. These are one of two types of people, people who took back a mortgage on the sale of their own home (owner financing)- whether it was their idea or not. You don't usually want these (not for gaining investors who will give you money to do deals anyway).

The second kind is a private lender, someone that loans their money out secured by a property. These are the ones you want. How to find the good ones? Call them and introduce yourself, explain that you are a real estate investor coming across a wealth of high-ROI secure low-LTV real estate deals and in search of short-term mortgage financing from private individuals to get the deals done.

One of three things will happen, two of which will make you money potentially.

a. They know exactly what you're talking about because they hold a LOT of private mortgage notes-- not just the one you found that prompted you to call them-- and love the high safe returns they get. These types will ask what interest rate you're offering or other savvy questions. These are the private lenders you want. Find out as much info as you can about them and add them to your database, promising to notify them first when you have a deal in the works. Don't worry if you don't have answers to all their questions. At this point having their contact info and them knowing who you are, being "pre-pitched" is all we're concerned about.

b. They don't have any idea what you're talking about or think you're crazy or aren't interested or have no money to loan/invest.

c. They know what you're talking about because they have a seller-held mortgage on a house they sold and in fact HATE that they are receiving payments over time-- instead of the lump sump cash they wanted (but couldn't/didn't receive when they sold). NOTE: Two questions here could make you a nice chunk of cash: "Why?" and then "Oh, I see, well Mr. Jones that's actually my specialty. I can get you all the cash coming to you within a week, and you could __(insert their answer to Why? here)__ right away without waiting all those years and the headaches of collecting payments. Of course, because you're getting cash in your hand, it would be a discounted amount from the face value you SETTLED for when you took the mortgage. If I could get that set up for you with just a few questions and you'd have the cash within the week-- would that be something you'd now be interested in?"

Once you've done this it's a simple matter to connect them with a lender you contacted in #1 or find a buyer through an online private lender clearinghouse where people broker mortgage notes to each other or calling someone more experienced or getting a private mortgage broker involved- though they'll take much of the profit. Any of these is an easy way to cut yourself in the spread for a few thousand dollars or more, with just a little paperwork and you're doing nothing unethical. If you do this be sure to consult a competent real estate attorney, however, because you're dealing with securities and complicated paperwork).

But again, the point isn't to find cash flow loans, it's to find lender investors for your own deals. Just think of #3 above as a lucrative sideline that costs you little but the time it takes to ask 2 questions.

2) Place ads "Money wanted. Up to Double Digit ROI %. Short term and long term. Minimum investment (insert here whatever 65% of the average value of a home in your area is) Private investors needed. Secure, low-LTV investments collateralized against income-producing properties. Free consultation. Call now.

Local people are best when it comes to developing investor partners for real estate investing. These people are going to want to meet you and see what you're about. Remember, professionals don't have to have all the answers. You just have to know you can get them! So use the local newspaper. Use bandit signs (these are the signs you see on the side of the road- just check your local county ordinances and attorney about possible penalties). Call the guys at 866-SIGN-GUY and even if they're not available in your part of the country, they'll happily refer you to someone who does it where you live I bet. Also, put the above ad on the back of your business cards.

A no cost option is placing the above on http://www.craigslist.org, the world's largest online free classified ads exchange, and other classifieds online.

3) Attend a private money bootcamp seminar, even if you have to borrow or put it on a credit card or convince a better-off friend who is like-minded to go halves on the cost for two to attend. There are some good options for this But it's pricey. Go to the training section of the HIS Real Estate website to learn more.

4) Go to your local REIAs (real estate investor associations). Don't ask these people for advice until you're experienced enough not to fall for the blind leading the blind phenomenon that prevails at many of these, or have seen proof of how successful they are and how many deals they've done. Get business cards, hand out yours. Ask the organizer to address you from the front of the room and introduce yourself. Let people know you're looking for money investors, and that you are in search of investor partners for real estate investing.

5) Improve your own credit.

Here are some simple, easy, and mostly free ideas that won't work for everyone, but will work for many:

-Hire a credit repair company (be careful there are some scams out there)

-Celebrate your successes and hold yourself accountable. Sign up for credit monitoring at 14.95/mo through Truecredit.com or another.

-Get someone in your family or a close friend with GREAT credit to add you as an "authorized user" or better a "secondary user" to their high-limit, long-history credit cards. Tell them it will not affect their credit AT ALL, and they can cut up the card in your name that is sent to them. You'll be surprised at how many points this can bump you up.

- Decrease your DTI and debt-to-credit limit ratios one of two ways. Pay down revolving (credit card) balances to BELOW 50% of the limits. OR, and some people never even think of this one...ask that your credit LIMITS be increased so that the balance owed is less than 50% of the new higher limit

- Remember, sometimes the best investor partner you can have is your own credit's ability to channel OPM

6) Call everyone who advertises "We Buy Houses" in your area. Many of these investors also lend on property as private lenders. It's a great way to find private lenders for real estate investing. With very little change in your schedule (just being AWARE and writing it down when you see these walking or driving- pull over first!) I guarantee you can create a database of HUNDREDS of these in your locality-- unless its extremely rural anyway-just by paying attention to billboards and bandit signs on the side of the road. This is an example of the phenomenon that when you want to make money in real estate without your own money it's What You Know + Who You Know = What you Get.

7) Realize that if you have the What You Know AND the Who You Know handled, What You Have right now is NOT IMPORTANT. Do you follow me?

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Danny Welsh is an editor of investing newsletter 'The Good Steward' with Investing Do's, Don'ts and Deals! Danny invites you to learn more today when you join America's #1 Real Estate Network at HIS Real Estate Network.

Also, find investor partners and private lenders using the new search engine for real estate investors -- a fantastic "bookmarkable" resource created by investors for investors.

 

I probably won't be able to go...but may juggle my schedule to try. But any of you in the NY area (and I think there's a good number on Real Deal within driving distance) may want to go check this out:

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Join us to see how you can profit from partnering with others that have a proven system and model for investing today. NREIS Currently has $1.6m of capital under management through both residential and multifamily partnerships.

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Chris is a friend and kind of former student. He's been on our email list with HIS Real Estate Network for years too.

Each success I see him and his partners have makes me up my own game considerably. In fact, I asked him a year or so ago to contribute content to The Greatest Real Estate Giveaway and he was shocked! I walked him through it though, and while he doesn't think of himself as a "guru" (neither do I) I think he now recognizes the personal branding value of positioning yourself (and striving evermore to become) an expert when it comes to gaining trust and raising money for real estate.

We both value the relationship. I'm sure he'd treat you quite well, should you have a chance to check out his presentation. And I know you'll learn some cool things. While I haven't in any way endorsed investing with him...a time may come that we do a project together. We'll see ;)

Danny Welsh
Director, Greatest Real Estate Giveaway

Equity Partners
Locating an equity partner would be ideal solution, if you found yourself in one of the following situations:
• You are in a Sell High cycle, but you find a real estate market that you really want to explore
• You want to buy something in the apartment commercial area, but the market keeps increasing rents and overall prices
• You find a million dollar building and finance $900,000, but the debt service requirement on that property is absorbing much of your profits. If you can get an equity partner, the equity contribution allows you to cut your debt service in half and makes the property more profitable on a monthly basis. Remember, you don’t have to pay out equity partners until you have a profit or distribution.
Tip: You need to be careful with the real estate cycle. Always know where you are within it. Remember, the market will continually come back because it’s a cycle. The key is knowing it will happen.
That’s when you need to sit down and research your particular marketplace. You use the same principles in the commercial arena with whatever is your investment product. It’s just a more intricate process, because many commercial properties are not listed with the MLS.
Banks and the Real Estate Cycle
The other element of the real estate cycle you need to understand is that the banks are usually out of sync with it. When the market is hot and prices are high, the banks are open for business. However, when the market slows down, you could get into a high inventory, low pricing, buy low scenario.  When this occurs, the banker, who is willing to lend is extremely hard to find.

If you didn't get to listen to this show on CNBC, please do it today.  This information is fundamental to having the right mindset for investing in anything.

Here is the link:

http://www.cnbc.com/id/15840232/?video=1329393420&play=1

Enjoy and Profit.

Ed Young
HIS Real Estate Network

This is an interesting discussion about what it takes to be truly successful at a level far above everyone else in business.  Taken from his book, Outliers, Malcolm Gladwell (with really wild hair!) brings up two significant points worth considering.  The first is that it takes 10,000 hours to become competent (an expert) in something.  The second is, the recurring theme through his books is that we don't become an expert in a vacuum - we need other people and mentors to help us get there.  Our education in any area of business or life comes from our curiosity of how it works.  Then we find information about it to lay the foundation for taking action.  Next we take action by practicing the skills associated with our education (read a book about improving your golf swing, then practice the technique).  That practicing sometimes takes many years and also may have its years of failures.  But if we persist, we will achieve the desired results. 

I have found that when you can partner with others who are more experienced than yourself (your mentors), you can learn from their mistakes and not repeat them yourself, thereby cutting years off the education curve.  As Gary Tharp is fond of saying, its not learning what to do that matters most, its learning what not to do that will keep you out of trouble and save you a boat load of money (my rough paraphrase). 

So if you are getting involved in commercial real estate, gather as much information as you can, then partner with others who are ahead of you in the game to cut down your learning curve.  Always be asking questions, be curious, and grow through the experiences and investments you are a part of, so you can avoid the costly mistakes.

I found this interview with Warren Buffett to be enlightening even though it may seem overly simplistic.  However, when I think about his comments on each of the topics discussed, they support the way we are approaching our real estate investing business.
Summarized, the rules are:

1.  If its too good to be true, it probably is.  This is what happens in every "bubble market" and the residential and commercial real estate markets are no different.  We are now past the bubble bursting stage in real estate, where value investing can happen.

2.  Always look at what the other guy is making when he's trying to sell you something.  I view this as a warning to evaluate a deal from all sides and find what the motivating factor is in every deal.  If you can understand the other person's position, you will have a leg up in the negotiating and can come to the table with many more alternatives to make things work to your advantage.

3.  Stay away from leverage.   I loved his quote "If you're smart you don't need it [leverage], if you're dumb, you have no business using it."  While commercial real estate uses leverage, the important thing is the cash flow.  If the cash flow supports the note you are using to leverage the deal, you are using leverage in the proper way and it is no longer speculative.  In our deals, we raise capital by partnering with other investors, thereby minimizing the leverage.  We also aim to return investor capital as quickly as possible.