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Thread: How would I finance a real estate investment company?

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    Default How would I finance a real estate investment company?

    Hello everyone,

    I am very interested in starting my own real estate investment business specializing in investing in multi-family apartment buildings. I do not plan on starting it tomorrow or anything but within 1-2 years is when I really want to start (I'm finishing up my college degree in the fall). Obviously large apartment complexes are not cheap and most people do not have the mountains of money laying around to put down on a property since banks want about 20% down give or take. Here is where the issue lies. I will be starting with very little cash of my own so I need a plan and a way to get/raise money to purchase my initial properties.

    I have done some research on the topic already and found out about hard money lenders and also some seller financing options that could possibly be available but I still need much more information.

    Does anyone have any ideas or suggestions on how I should go about this? When I first start out I would like to raise anywhere from $100,000-$300,000 in order to prove myself and really get going before I go on to larger and larger deals.

    Any advice and or constructive comments would be greatly appreciated!

    Thanks
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    I think Woodrow Wilson was in office when I last flipped through this book, but if memory serves, Cummings serves up some decent info at a "get your feet wet" level, while remaining nicely above the "Real Estate Financing For Dummies" level.

    (I'd send you my copy if I could find it, but you see from the link you can pick up a used one for shipping + a penny. Or his newer edition is here.)

    Considering that you're at the preliminary planning stages, there are three areas in which you'll probably want to be focusing your research for now:
    Most importantly, of course, is developing a solid understanding of your target asset class. But I know I'm preaching to the choir on that one, so I'll fast forward to the other two.

    Your post implies you're contemplating outside equity investment for the 20%, 100K - 300K piece, and similarly for subsequent larger deals. So spend some time learning how real estate partnerships tend to be structured. How they tend to be organized and managed, what kinds of terms are incorporated in typical partnership agreements for real estate deals, the basics of the tax implications and how they're handled among the partners, and so on. You'll definitely want both an attorney and accountant when (or a bit before) it's time to actually put a deal together; this is true anytime you're dealing with real estate, and anytime you're dealing with multiple owners in a venture. In your case you're dealing with both.

    So while you don't need to get your law degree nor your CPA certification to move forward, you'll want to understand the fundamentals of how real estate investment partnerships tend to be put together, and how they operate. Cummings probably has a chapter or two on it, and a bit o' Googling for "real estate investment partnership" will bear fruit.

    The third general area is related to the previous. Raising capital from investors--in any meaningful quantities--involves navigating some tricky federal and state rules which regulate the issuance of "securities" to investors. (As a side note, securities laws consider nearly anything---including many partnership interests, except in limited circumstances---to be "securities". But these rules are among the least known by the general populace, and hence get broken more often than the lock on Dean Martin's scotch cabinet. But that's no reason for you to expose yourself to an investigation by the regulators, da?)

    So do spend a little time getting your arms around the basics of so-called "private placements" and Regulation D (yep, Google again). Do be aware though, that significant changes seem to be afoot with respect to the "general solicitation" issue; see, e.g. here and here.

    Just a couple of thoughts at large. Best of luck with it, and keep us posted on your progress.

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    The little research that I have done on real estate investing has lead me to believe that you can start investing without money. If you find a property then flip it to someone else before you have to pay, you might be able to raise some capital that way. Or you could try to get owner financing. Have you researched either of these options?

    Good luck.
    Tomas Merrill | Small Business Entrepreneur, Blogger
    Check out my small business blog.

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    Thank you both for your help.

    The little research that I have done on real estate investing has lead me to believe that you can start investing without money. If you find a property then flip it to someone else before you have to pay, you might be able to raise some capital that way. Or you could try to get owner financing. Have you researched either of these options?
    I do know that these things you mentioned are options. Through my research however, many owners of properties want a cash deal and do not want to carry financing but there are ones out there who will do some kind of financing options. I also know that some people do the flipping of contracts for quick cash without having to do much work at all but that can be extremely risky if you can't find a buyer in your set number of days 30...etc...


    ArcSine, you offer some great advice. I realize that to have a successful real estate investing business it takes a strong team, CPA, specialized lawyers, etc.

    What I truly want to do is just get help with my first couple of deals because I know that the first ones are the most difficult just because everything is brand new. I don't want to have to start investing in 2-4 unit buildings at first because I know where the real money is made is in the larger properties. Obviously to do this I would need financial investors to go in on the deal with me to help me with the down payment.

    I have been reading as many books about real estate investing as I possibly can to just try to absorb everything like a sponge. I know now that before I even consider bringing on investors I would need to get a good securities lawyer and sit down with him or her and discuss everything and have them write up all my paperwork.

    I want to be successful in this type of business more than anything else and I know that I just need to keep educating myself and then just get off my duff and make my first deal! I know I will gain more and more confidence the more deals that I make.

    The financing side is still somewhat confusing to me because it is so HUGE and hard to grasp everything. All the different types of bank loans, investors, seller financing, etc...there is just so much to know. I plan on joining a real estate invester group to learn from others who have done it before so hopefully that will help as well.

    Feel free to comment back about anything you would like, advice, experiences, anything. Thanks again for your help!

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    Quote Originally Posted by Golfman530 View Post
    The financing side is still somewhat confusing to me because it is so HUGE and hard to grasp everything. All the different types of bank loans, investors, seller financing, etc...there is just so much to know. I plan on joining a real estate invester group to learn from others who have done it before so hopefully that will help as well.
    That was why in particular I suggested J Cumming's book in the previous post; it's more about the financing of the deal than of the other aspects (such as analyzing the property).

    Of course his book isn't the only game in town when it comes to financing and structuring RE deals, it's just one I remember going through sometime back. The link to the book on Amazon might also lead you to other works on the same topic.

    Glad to hear that you're aggressively pursuing the homework phase, 'cause when you put Careful Homework into the blender along with Action, you stand better odds of whipping up a tasty concoction.

    One thing I might mention is that over the years I've worked with a number of successful RE investors, and one common thread that was usually present across them all was familiarity with the local bankers. They'd find out the individuals who handled commercial real estate loans at the bank, and get to know 'em over lunch or coffee. The banker, of course, is usually interested in investing a little time in exchange for a possible new source of loan origination business, and the investor has the chance to find out exactly what kind of deals the banker has an appetite for. Later, if a deal is coming together, the investor is already a known quantity to the banker, and that can really give the investor a leg up on getting the wheels turning.

    Getting a read on the bankers' appetites beforehand is probably more important now than in years past, as the lenders have in some cases thrown out the old rule books and rules of thumb on bankrolling deals, and getting familiar with the new guidelines straight from the horse's mouth over a cold beer could be very helpful for you. (I can't remember any Christmas party I ever attended at the home of a real estate dealmaker, where there wasn't at least one or two bankers--RE lenders--in attendance among the invitees. Couldn't hurt!)

    Cheers!

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    Congrats on your plans to invest in real estate. There are lots of opportunities.

    Keep in mind that initially your investments will probably not produce much cash flow, because you are going to probably try to get as much debt on them as you can. That's ok, but it means you will need another source of income, because you want to be able to reinvest your proceeds in more real estate, and not use them for living expenses.

    So, even if you convinced your rich uncle to invest $200,000 and you used that to put down 20% on a $1M property yielding 10%, by the time you pay the mortgage and give some return to your uncle, there wont be much left over.

    One angle is to be a real estate broker. You can make a living from transactions you do for other people, but even better, you learn the market, see a lot of deals, learn which are the good ones and which are not, you'll meet people that are buying investment property and build good relationships with them.

    If you dont want to be a real estate broker, you can get a regular job somewhere to pay the bills. You might not see as many good deals then if you were in the market full time, but it does have the advantage of having a regular income which makes it easier to qualify for a loan (compared to a commission based real estate broker).

    With your regular job, you will have the income to qualify to buy a house, and as an owner-occupant, you can by a duplex (really 1-4 units) and still get attractive financing. (3.5% down with fha, 5-10% down with other programs). These are much better terms than you could get then if you were a regular investor.

    If you are handy, you can fix up the property a bit, make some income, and in a year or two, lease out your unit and go buy another one, also as an owner occupant. If you're graduating now and buy a new one every other year, in a decade you'll have a nice portfolio, some of the debt will be paid down, and hopefully you'll be cash flowing. If you focus on getting rich slow instead of getting rich quick, you'll be better off in the long run, i promise. (after a certain number of units, the bank will cut you off and you'll have to do investor terms, but hopefully by then you'll already have a good base.)


    Last thing: as you are beginning this endeavor, remember this. Your ability to successfully buy real estate investments hinges on your personal credit. Nurture your credit like a delicate flower. The difference in your long term income if you get good bank debt versus hard money loans, overtime, will be huge. There is a place for hard money, but treat your FICO like the golden egg.
    Last edited by Pss; 06-16-2012 at 11:42 AM.

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    So what have you done since your last post? Are you investing in apartment complexes? I am too looking to get involved in something very similar and we've probably read a lot of same books on the subject. Let us know how it turned out for you.

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    hey just wanted to check on your status of setting up your real estate company. i am also in the same phase of trying to learn as much information as i can right now. currently i am working on my mba degree and after i am finished (which should be in a year) i am looking to go full throttle. please let me know if you have any advice or knowledge that you can pass to me that you may have gained since the first time u composed this post.

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    hello there. my name is Brandon, i came across your post by googling starting real estate investing business. pretty much waht your doing is EXACTLY what i want to do, and i have seen your post is a bit older. i was curious where you were at with your business, and if all of your questions and answers on this post helped out. any input would be greatly appreciated. hope to hear from anybody soon.

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