In Part 1 of this multi-part series we talked about how we found the Carver triplex. Part 2 covered the due diligence and the numerous material issues prior to closing. In Part 3, we’ll jump into how we funded and closed on this terrifically turnkey property!
Recap: in the beginning of January, I found the property, put in the offer and went under contract. We had some money to cover due diligence, but closing costs and the down payment came to be about $48,000. Originally, I thought that we were going to use a residential loan and bring in partners to finance the deal…or so I thought. Lesson learned: a residential loan requires the guarantor of the loan to have the money for down payment and closing costs in an account consistently for approximately 2 months prior to closing. That little misunderstanding makes it difficult trying to bring in partners.
Obviously, I didn’t have the money so I had to kind of scramble to figure out what was I going to do. I couldn’t use a residential loan, so I turned to my real estate agent and she pointed me towards a local credit union, ABNB. Being a local credit union is advantageous in several ways: 1) they are more likely to support local businesses and local property purchases and 2) they are able to be more flexible with their terms, timelines and lending requirements for their loans.
So, I decided that instead of applying for a residential loan I was going to use a commercial small business loan, with the property in my name. Why is this significant? I personally guaranteed the loan, which means that if for some reason we defaulted or violated the terms of the loan agreement (i.e. we weren’t able to pay the mortgage or the mortgage was called due) then I would be held liable and my assets would be at risk. At $215,000 I was willing to take that risk. This was actually one of the negotiating tools I used when discussing with potential partners.
End result: we used a commercial loan through ABNB, personally guaranteed by me. We met the requirements for a smaller commercial loan or an SBA–Small Business Administration loan. It was a Recourse loan (personally guaranteed) at 5.75% interest rate, for a 7-year term length and a 25-year amortization schedule. It provided a quicker closing time than a residential loan–about a month total. The best part about the commercial loan was that ABNB just said, “we just need to see the money, we don’t care where it comes from, just that it’s in the account on the day of closing for the correct amount.” Of course this is a bit paraphrased, but the bottom line: we could use investors/partners!
Going about finding partners for this deal was quite an experience and I found my two partners by two different means. I knew I needed to raise about $48,000 so I made a deal package for this property explaining what was going on with the property. I had a simple breakdown like this:
• Executive Summary
• Property Description and Highlights
• Value Add Opportunities
• Financial Projections/Proforma
• Acquisition Summary
• Investor Structure and Returns
• Bio of the Asset Management Team
The minimum investment was $12,000 by splitting $48,000 into 4ths, with the intention of finding 4 partners that would each bring in 12 grand to cover the deal and they would get a 15 percent split on that. So 60% total equity to the capital partners and I would get the other 40 percent of that total equity position as well as cashflow. With my deal package and my investor terms in place, I went about finding my partners. But where to look??
The first partner I found through Bigger Pockets. I had made a habit of connecting myself to a new person everyday on BP so by the time I started looking for a partner, I had about a 100 or so individuals I had connected with. I reached out to each and discussed the details of the deal with them. I had one investor, who also happened to be a Naval officer, express his interest. I invited him over for coffee and we talked about everything Navy and about the deal itself. After about an hour of getting to know each other, he agreed to invest $12,000 in the deal! Only $36,000 to go!!
I met the second partner through my real estate agent and we had previously met at multiple real estate events in the area. He was also Navy but had more experience with partnerships, managing managers and purchasing smaller multifamilies than I did. He owned a few duplexes, one of which he was house-hacking at the moment. Needless to say, he brought a desirable amount of capital and experience to the table. After quite a bit of negotiating, we settled on a cashflow and equity split that would provide 11% Cash on Cash Return (average) over the life of the hold. With that handshake, I sealed up the remaining capital with 2 weeks to closing!
In closing, I want to make a few points because I think they are absolutely vital: capital investors (clients) invest in the team, not the deal. In an extremely competitive market, everyone is offering insane investor terms to try and win clients in their deal but how you stand out is within the team you build. Take care of your clients and your clients will take care of you. Relationships in business are all built upon the trust and integrity of the partners. No one is going to invest in you if they don’t trust you. In my opinion, the top three things that clients care about are:
Can they trust you to carry out the deal and the business plan you have developed in a integritous manner? Can they trust you to get the returns you are advertising? All of that is based off of experiences you have had, your alignment of interests within the deal, whether or not you have money in the deal, and the property itself.
As an investor, if I give you this money, do you have the experience to get this deal done and not waste my time? Do you know how to conservatively underwrite? Have you done deals like this before? How do I know that you can take this property from contract through closing and manage it afterwards? Experience is huge, but if you don’t have experience, you can bring another partner in that fills that gap you’re missing. Don’t be afraid to ask for help if you need it- that too is a sign of a smart businessman.
No one is going to trust you to do what you’re saying you’re going to do if you don’t know what you’re talking about. Do the research. Walk the property. Know the market. Feel confident enough to say “I’ve talked to this property manager, he’s charging this management fee, he manages this many properties that are similar to ours, they have this fee structure.” You should be able to know the ins and outs of the asset like the back of your hand and then some. Surprise your clients with your level of detail and depth.
So, that is the story of how we closed on Carver! In another two weeks, we are going to be taking a brief break from the story of Carver to talk shop about multifamily deals… But we promise we will return with how those red flags during inspection came into play along with the consequences of partially-built privacy fences and not carefully reading contracts. Be sure to follow us if you are interested in our story and check out our website if you are interested in our business! We are expanding our social media too, so be sure to Like us on Facebook and Follow us on Instagram.