Private funding. What if you had more capital?

Real Estate Investing Real Estate Financing
1

If people are up for a little sharing, I am interested in hearing what different people are doing to attract and then use private funding. In addition, would more capital help? Or are you constrained by not enough time given the way you presently operate.

Starting with the capital…

First, how to attract private capital?

What have people done to get in front of people who have extra cash to invest? How do you explain what you do? Assuming you have been successful, what do you think really closed the deal? Do people understand how the laws apply when trying to attract private capital?

Second, how to use the private capital.

I am finding that most investors have a limited ability to actually use private sources of funds. Their business model is not very scaleable so the REI would not know what to do with a large jump in available capital. What is your perspective? If you could easily raise a large amount of capital, could you handle more deals? Would the quality or profitability suffer if you did raise your game?

As a little background, I have worked with private money in the past and continue to do so, I have attended multiple times the CREOnline Lenders Workshop run by Ed and Terry so I know the details that are shared there. I have worked for investment banks in London, New York, Switzerland and other locations. I also have friends who have been very successful in the tech sector including one who co-founded LinkedIn. I am used to a lot of zeros. I happen to like residential real estate investing (USA & UK).

I want to hear from actual RE investors and what they are doing in their market. How would your REI activities & you focus change if you had more capital. Significantly more so not some minor change. Enough capital so you could step up to the next level what ever that might mean for you.

The motivation for asking? I have been talking with some investors that I know and I am finding most have a limited ability to successfully use (deploy) more capital. To eliminate the risk that my selection bias is causing the skew in the results, I am opening up the conversation.

Using language from technology sector, I would describe a business that does not scale well as a lifestyle business. Good for an owner-operator who is OK knowing that things will largely grind to a halt if they stop. They love what they do so there is no problem that things will stop when they do.

I am trying to figure out if the lack of scaleability is caused by a lack of capital. If that is the case, the business would swiftly change once the capital is secured. Alternatively, there is a desire not to significantly grow so more capital is not really going to help. A third alternative is the REI has not thought about what to do with more capital so they just do not know what to do or how to attract it.

Your views?

If you think capital would make a large difference, do you actually have a plan for how you could use the capital once you find it? Is there a business plan or something that is credible (to you) so you could attract cash investors?

2

Good question, John,

I have tried various times using and attracting private funds, not very successfully, I might add.

Yes, when I used to renovate/restore homes in a particular historic district in Atlanta I was well known for that and had several lenders that would give me hard money, with everything rolled in.

Had one partnership with that and that went completely bad - never again.

In California I could never find anyone that would lend rehab funds, without me having significant cash myself or owning property in California.

Someone (who controlled a fund) offered to partner with me and fund deals, here in Atlanta, we flew here and he suddenly got cold feet, even though we had awesome deals lined up. I did prepare a whole business plan for that. I found out later that he’s known for doing that.

Also had someone who was going to lend me on one of my free and clear rental properties and then tried to change the deal and then backed out.

Basically, I have never really had a great experience with dealing with other people. I just don’t work in a way that someone very structured feels comfortable with. I take risks and if I see opportunity I go for it. Not for the faint of heart.

Money in itself is not a huge motivator for me. There has to be something involved that I can get passionate about. And business people are of course mostly motivated by money and structure, which is not me ;-).

Could I do more with more money? Heck, yeah, I see tons of deals all around me every day. But I don’t really feel the stress that’s involved with having to answer to other people and the way they want to meddle in my decisions is worth it.

Just my opinion - I’m weird, what can I say :wink:

Michaela

3

Great thread! I feel that private money is best way to finance short-term flips and I look forward to hearing how others have attracted private money.

I believe personal trust and a good track record is the best way to convince an individual to invest in your real estate business.

I financed my first flip using a combination of my own cash, financed one of my vehicles, credit cards, and borrowed against a life insurance policy. Talk about creative financing! shameless off topic plug for a place I spend way too much money-get a lowe’s credit card if you don’t have one. 5% off instantly or 0% financing for large purchases

By purchasing my first flip right, creating a great product, and selling for a profit, it gave me a little credibility.

After doing a couple more with my own cash, people around me started to notice and realized that this is something that makes money.

I generally purchase my flips for $15k-35k and put $20k-30k in renovation and retail them for $55k-100k, so the numbers in my flip area are very accessible for cash buyers. This allows me to help out investors with small amounts of money like $10k to make excellent returns, well secured by real estate, and gives me more flexibility to buy more deals.

I offer my private investors generous returns compared to what the CD market offers: 1 point plus 10 percent annually. I could offer less, but that seems like an equitible return for the “risk.”

I would only use money structured this way in a flip with a hold time of 3-6 months. For buy and hold acquisitions I prefer my own cash or conventional financing.

All my private money at the time is from friends/previous business partners and family, so I didn’t have to go looking for it. My success in the business attracted these people to me. All I had to do was show them my numbers and my product and they started writing me checks.

Another good source for private funds to flip houses are real estate attorneys (at least in Georgia… possibly title companies in other states?). If you have a track record with successful investing, attorneys tend to know people who like to invest in unconventional high-yield ventures. You could/should also offer the attorneys that bring you the private investor all those closings so that it is a win-win for everyone.

…

Now, the fun part… what if I had more private funds available to me??

I would obviously do more deals, but I feel that there is only so many I could handle at once… A real estate flipper is at the mercy of his contractors. I have a couple go-to crews that I could work simultaneously, but I am limited to doing 12-15 deals max a year with my current people (keeping my rule of selling within 6 months). Most of the flips I buy need extensive repairs and take 2-4 weeks to renovate running smoothly. If I had unlimited capital and unlimited deals and I wanted to do a higher volume than that it would force me to seek more trustworthy/quality help, which is a process in itself.

The other problem I would run into is finding a deal. As a flipper, you have to buy right. Sometimes there just isn’t the inventory out there to make a deal. I’m not in a huge market, and there is a ton of competition. Homes that are priced right for investors typically see multiple offers and sometimes go for way above list. One of the worst things you can do as an investor is over-paying for a SFR just because you need something for your workers to do.

This leads me to conclude that ramping up my real estate business (mom-and pop, but good for little old me) beyond the 12-15 rehabs a year is not a the best plan for the new-found capital… I believe the real money can be made in the REO bulk sales that are hitting the markets. Once investor in my area recently purchased 50 units with one purchase and did so at a tremendous discount. I believe his exit strategy is a combination of wholesaling as-is to his network/MLS, fixing and renting some, and fixing retailing the rest. When you buy at that level or better, there is definitely a discount when buying in bulk!

4

I’m really learning from the experts here! Everyone gives very informative response! I would say also yes to the question. An extra fund matters when it comes to business because it will mean more deals and even more profit in a matter of time. You just have to be wise when using that kind of money especially the borrowed ones.

5

I’m in metro phoenix

seeking private funding otherwise known as skin-in-the-game.
Can structure equity LLC for passive investors.

With passive investor funding to cover the rehab i can then offer it to Ed Garcia to fund the acquisition.

Ed, if you are not available or not interested I have local Phoenix hard money.

Questions: you can respond here or private email.

Cork Horner
Phoenix/San Diego

6

Would more capital help my business?

Yes… But not as much as in the past four years. When the local RE market bottomed (about 4 years ago), the banks had totally quit lending me money. So I started an aggressive search for private money. My elevator speech: I am 40 years old (44 now) and have never been a day late or a dollar short with any payment, ever. Credit score over 700. I have owned rental property since 1998, and survived the RE crash without a blemish. I own several free and clear properties, and would like to borrow against them. Interest rate is dependent on LTV, loan amount, and terms - offered 8% for 10 years with 50-75% LTV. It took me about one year to find a private lender. After a process of getting to know each other, we ended up negotiating to 8.75% for 7.5 years. Once the first mortgage showed him I was for real, I say what I do, and do what I say, he said he had more money, and wondered if I wanted to do a second. Over the past four years, we did 22 mortgages, and I bought 22 properties at bargain prices. All cash flow positive after all expenses, and all will be free and clear in 7.5 years or less. Mortgages average about $25K each, and I average about $5K of my money in each deal. For the most part, I invested his funds as quickly as he had more available. My total positive cash flow left me with little problem coming up with my part of each deal. I usually pay cash with my money, and we do a mortgage after the closing, giving me back most of the money to go into the next purchase. This kept me and 1-3 handymen pretty steady busy. If I had more funds, quicker, I would have got more help, done less labor myself, and more managing. I could have doubled what I was doing pretty easily. Times ten - no so sure. With an offer of times ten on the table, I would have told them, let me start with maybe $200K or so, and put it to work. As soon as I am able to ‘set it and forget’, have the houses done and rented to good people, I will work on more. I manage 36 houses myself now, and probably do half of the labor myself. I could hire out all labor, and double to 72 with no problem… 100 - maybe. I could, but not sure if I would want to (be that busy). Could hire property management, but results would suffer some - 99% of hired managers aren’t as good at it as I am. As it stands, my plan for management is to eventually and gradually shift it to my son when he gets a little older (if he still wants to do it).
However, as for the big capital jump… RE prices and competition has increased significantly in the past 12 months, and the same deals I was buying for $30K fully repaired are now upwards of $40K fully repaired. Plus, I could throw a stone in 2010 and hit a bargain; maybe make 3 lowball offers, and get 1. Today, I can make 20 offers that I consider aggressive, and I may or may not get 1. To ramp up my business, I would need a longer term than 7.5 years, so I could pay a little more, and still have positive cash flow from the day I buy. Also, would quit advertising “Beat CD Rates Safely”, and go back to “We Buy Houses”. Increase marketing (I do almost none now outside of magnetics and business cards). Recruit more help. Could I be successful with ten times the capital - yes. On the same level as what I did the past four years - no. But then, buy and hold today won’t be as good as the past four years regardless - rents haven’t changed much, but prices are up. The same numbers aren’t available.
Like many people, I can and will be successful at whatever I set my mind to. “What we think about, comes about” - Mark Victor Hansen

“You can have your excuses, or you can have your dreams, but you can’t have both.” -Chris in FL

7

Chris,

Where in FL are you operating?

8

Another Option - sellers that will finance you

I am in a mentoring program with a seller finance guy. He does a lot with notes and buying defaulted notes. One huge model he teaches us to look at is to purchase a defaulted note, foreclose or deed in lieu to get the house back, then sell it vacant or with a tenant with seller financing.

This is his 50/50 model

So for example we have a tenanted house that rents for $750 a month, we want to sell it for $49,900. We want half that down or something close to it and then we finance the rest, either with a 5 year note that has higher payments or a 20 or 30 year amortization and a 5 year balloon.

So if you are looking for rental property and have 100k - you could only buy two of these houses all cash and may not be able to find a traditional lender who would finance you or even a private lender for the long term hold. But with us sellers providing 50 to 70% of the financing, you could buy 5 to 6 houses with the same $100k.

Plus when the seller is also an investor, they understand your situation better and can help put together a more workable loan for the investor - with little to no closing costs up front, just down payment, title company and filing fees, no underwriting in most cases.

9

Private Money

The most significant source of private money for us is the owner of the acquisition property. Owner-takeback financing can be very win-win, paricularly in cases with very high equity. We’ve had good success with senior sellers, once they realize the re-investment rate of “safe” investments such as CD’s vs. what interest rate they can earn on a first trust.

The DC area market is awash in private money funds seeking real estate. Particularly, investment grade commercial and multifamily buildings. In order to compete with them I would cater to “patient” money vs. “Fund” money that is anxious to apply their capital quickly because it’s just sitting in a big pile waiting to be “invested”, earning little to no interest.

Patient money that can make quick decisions will still be competitive today. It will take making a high volume of all cash/quick close offers on residential housing and/or secondary property types that are just outside the fund target property parameters.

10

Investor in Seattle

I bought about 70 properties last year. A couple of them were land deals. The rest were single family homes. I’m a pretty active flipper. I’d use my own cash and the rest I would borrow from various private lenders. They’d charge me 2 points, 12% APR, and around 10% down. Now we’re down to 5% down. These lenders know my track record. They fund these properties sight unseen and can close within days for me. I paid a lot (around 600k in just interest payments to these lenders last year) but then I wouldn’t have a big business without them.

Of course I’m trying to find cheaper financing now but haven’t been able to do so or put much effort in doing so. My credit score is above 730. Been doing this for about 10 years. this year I’m hoping to buy about 100 properties. It’s tough shelling out over 60k in interest payments each month and then having to pay at least 200k each month to finance these projects. And then there’s the down payments and assignment fees I have to pay for each deal… Unbelievable. I don’t know how I’ve been able to manage…

11

Private Money

Private Funding has its many advantages. In today’s world of relying solely on FNMA & FHLMC, who will make you run through the hoops, limit your capacity, and bog you down for no less than 3 weeks with the very best in Lending Officers, to near eternity when, an investor chooses the attraction of lower fees and rates their local banks or internet sources advertise over a quality funding/production line office. Private Funding is a much less expensive silent partner, without the hassles of conflicting personalities, idealisms and pace.

Private money comes at higher costs, but the cost of risking all of your cash and/or forgone opportunities of using too much cash is far greater. Not to say, one should purchase properties without application of thorough due diligence. But I’ve found, if a project cannot support a privately financed structure, than the project isn’t all of that and a bowl of ripe cherries. Especially, for those with short term business models of 1-3 year holds and those flipping within 1-6 months. It’s all about math, and if the math works, who cares if you are paying 9% or 12% over a 6-12 month hold period. What is your cash on cash return with parting with 5-15% cash, supported with a 12% private note; vs. 20-25% down cash and a 5.5% conventional note; vs. outright funding your entire project via cash; or worse, taking on a 50% partner? Do the math, and you’ll be begging to pay the limited amount of real private lenders 15% + 3 points to fund your deals!

Incidentally, I underwrite for two private equity funds here in Florida. 10-12% I/O, 5-20% Cash (Skin in the game). 1%-3% points (Many are issued with 1 to 1.5%, if you don’t have a Realtor), depending on deal size and risk. The collateral, exit strategy and history are my main focus of analysis. SW, West and South Florida Only.