In recent articles, I have talked at some length about hard money lending for multi-family properties. What I’d like to do here is to compare hard money to private money, which are in ways similar, in ways different, but definitely confused with one another when investors discuss them.
Both hard money and private money are typically asset based loans, backed more by the strength of a real estate purchase than the financial credentials of the borrower. They are both from non-traditional lending sources (i.e. neither are banks or national lenders). So what makes them different?
Hard moneylenders, despite their non-traditional status, are still organized moneylenders and are usually in some way licensed to loan money. Private lenders are just what their name suggests, private. They could be a friend, family member, business associate, or maybe just a professional referral. In any case, their role as a provider of funding is strictly as you agree upon with them.
Hard moneylenders typically have lending criteria. Their loans have defined durations, interest rates, and upfront points, all of which are known prior to a loan ever being issued. In fact, these criteria are often used to differentiate and select hard moneylenders, when investors are shopping for available options.
Private money is much more flexible on all of the points mentioned above. Most have no preset criteria and the loan terms you work out with them are almost always a function of how well you negotiate them for a particular loan. Limits on lending, interest rates, and loan duration are all, as they say, ‘open for discussion’, so a simple commitment to an agreement suitable to all parties will often get the job done.
An important thing to mention is that private money is characteristically cheaper than hard money. This is not always the case, but it is a common trend nonetheless. Why is this? Most hard moneylenders get their funds (at least in part) from private sources so they must mark up their interest rates and fees to make a profit. When you work directly with private sources of capital, you effectively cut out the “middle man” and can thus be in line for better terms.
The obvious caveat to private money is that lenders are not usually out there advertising that they have money to lend. Hard moneylenders will often do just that, because they are specifically in the lending business. It just makes sense for them to promote what they do. Because of this, hard money is usually easier to find and requires fewer business/negotiation skills to secure a loan. If you’re willing to make the effort, private money is out there, is very comparable to hard money, and is thus an excellent way to fund deals.
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The effectiveness of your network determines the strength of your real estate investment business. I’m always on the lookout for new people to work with – new private investors, new bird dogs, and new players in the market. The way I see it, I am only as good as the weakest member of my team. In fact, I firmly believe that a strong network of people working together can propel any investor to new heights in their commercial real estate career.
A strong network of experts lowers investment risk. Needless to say, I hate losing money. While I can’t factor out all the risk in any real estate investment I take on, I understand that I can remove most of it. How do I do that? I get my team of experts involved in my deals. I have a great team of people working for me, but did you know that networking was critical in the formation of my team of experts? I had to get out of my comfort zone and start meeting professionals who could help me. I had to seek out the counsel of other professionals when parts of the deal didn’t go as planned. I had to network myself.
A strong network of deal sources means you always have a full pipeline to work with. A broker may bring two or three properties to the table. Mr. Smith the postman may inform you that he heard through the grapevine that the owner of a small, local mall nearby plans on selling. Ms. Mae just referred you to her rich Uncle Benjamin who wants to buy another apartment building complex. All of these sources have one thing in common. They all relied on networking to bring in deals.
Networking ensures that you’ll always have people to work with no matter what type of property you’re investing in. Smart investors continuously work on building a list for three groups of people – buyers, sellers and private money investors. This is where I focus most of my effort. If you have a constant flow of people moving through your business, chances are you’re running a successful commercial investment business.
Okay, at this point we can all understand the need for networking. We understand the power of what a group of people can do for us in our lives. But how effective are we? If you’re out meeting people at every opportunity you can, but you’re not yet realizing the results, it’s time to make some improvements. The success of your business is counting on it. Here are a few tips.
1) Be sincere when meeting people for the first time. Insincerity will often speak louder than anything you could verbally say. Any attitude of insincerity will show through in your body language, tone of voice and even when you may seemingly be smiling.
2) Make it a point to develop a deeper relationship. People will do business with you simply because they feel more comfortable with you. For that reason, spend a few minutes and get to know as much as you can about the person you just exchanged cards with. In fact, eliminate business card blitzing. Not only is that impersonal; it’s also difficult to really remember and get to know 20 – 30 people you just met. We don’t only want to spread our business card around, but we also want to develop a quality relationship that blossoms into something further.
3) Have an elevator speech already prepared and practiced. For many people, networking doesn’t come easy. They have to work at it to be successful. Write out your speech. If you have others around you, ask them to role play with you and practice until you’re familiar with it.
Successful networking brings you business. You’ll need people to protect and operate your commercial real estate investment business. You’ll also need people to keep your deal machine running. Commercial real estate investing is a people business. By practicing these few tips, you’ll be well on your way to achieving all the success and dreams you desire.
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As you may well know by now, private money funding is one of several options you have for funding a commercial real estate deal. The real trick is to know where to find such funding, and then to know how to lock it in so you can properly use it. I’ve used my share of private money over the years and what I’ve found is that private lending success comes from two key things: how you present yourself and how you present the deal.
Presenting yourself to a private lender needs to revolve around your professionalism and your commitment to the types of deals you do. For this reason, a simple summary proposal is a nice touch, when you first begin visiting with a particular lender. In such a proposal, you can provide snippets of your business philosophy, history, experience, etc. You can also show examples of how you would handle a particular deal, giving a lending prospect a quick idea of what it is like to do business with you.
There are several ways to put together a summary proposal and there are a similar number of things you could call it. The bottom line is that if your business is worth telling people about, it’s also worth putting in writing, and a person looking to learn more about you is less likely to want to read a full-blown business plan that is less relevant to their immediate interests.
Once you have gathered some interest from private lenders (not to understate the importance of this step), the next step is to actually present a deal to them when one comes your way. How you do this will be very important, given that your credibility with a seller will be somewhat dependent on your ability to not only attract funding, but also have it when you need it most.
When putting a project summary together, remember the key components that are important to you when you evaluate a commercial deal for your own business. First, there is the price tag, which should be competitive, relative to market value. Second, there are the market conditions, which should show some stability and also signs of good future growth. Last, there is of course the property’s cash flow, which should be acceptable to all parties involved. Once the basic elements of a deal are in place, then you can really dive in and start negotiating the terms of use for a private lender’s funds.
Don’t ever forget that using private money is serious business, so make sure you have a good team in place to support your efforts, and be sure to treat a private lender’s funds as carefully as you would your own. These two things can really simplify the use of private money and open key doors of opportunity for your commercial real estate business.
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“I read this interesting article in this month’s units magazine. Notice that it’s talking about all of the bargains that are available. People say I got a head start because I bought properties so cheap during the last down turn, well they are right and now it’s your turn to have people say that about you!! Enjoy the article and put in an offer today!!”
For many investors, high-quality properties are available for about 50 cents on the dollar.
While apartment owners trying to dispose of properties purchased at the peak of the market may be feeling indigestion from all the red ink, investors with cash are licking their chops at the number of apartment communities available for purchase at sizable discounts.
“If you have access to capital, you can buy properties for 50 cents on the dollar,” says Del Walmsley, an independent rental owner, investor and Founder of Houston-based Lifestyles Unlimited.
A number of factors are contributing to the abundance of discounted properties. Large companies, such as REITs, need to raise cash and increase liquidity to pay dividends and pay off debt. With secured capital so difficult to come by in the current market, they must sell properties in which they have equity.
Tim Naughton, President, AvalonBay Communities, said at a National Multi Housing Council finance forum in early June that his company has been in defensive mode, raising capital and increasing liquidity. Disposition of properties, he says, is “a backdoor way of tapping the secured debt market without bringing more secured debt onto the balance sheet.”
The difficulty with accessing credit also makes it more difficult for real estate owners who purchased with high leverage at the height of the market (2005 to 2007) to refinance loans that have begun to come due. With lenders calling on those loans, the owners must sell to meet their obligations.
Even “traditional” foreclosures—those caused by ineffective operators—are creating opportunities for investors. Because banks also are pursuing liquidity, they are selling apartment communities they have obtained through foreclosure for low prices. Investors may be able to acquire distressed properties from the owner, through a receiver, a share sale or directly from the lender, the bank or insurance company, says Greg Guerrero, an independent rental owner and Managing Member of Apartment Services Co. in Tulsa, Okla. In addition to foreclosures, some properties may be available through bankruptcy, he adds.
“When the tide goes out, you see who’s swimming naked,” Guerrero summarizes. “When economic conditions become tough, inefficient properties fail.”
The number of apartment properties falling into financial trouble is far outstripping the number of distressed communities resolved through sale or otherwise, according to a June report from real estate research firm Real Capital Analytics. Outstanding apartment distress is up $8.1 billion year-to-date and totaled $16.8 billion at the end of May, according to the report. Another $750 million of apartment properties had gone into default or foreclosure through mid-June, the report adds.
Those distressed apartment properties are having an impact on prices, though they do not entirely dominate sales. “The percentage of distressed sales in the apartment sector is up considerably this year,” the report states, “but still only averages between 10 percent and 15 percent of total volume.”
Local Banks Lending
With so many lenders no longer in the apartment market, it may be difficult for investors to find capital to take advantage of these opportunities. But that difficulty in finding financing also means investors may face less competition in bidding for properties, Guerrero notes. Nevertheless, he says he still faces competition in his market. “It’s always a matter of what the market will bear,” he says. “Some people have paid amounts that are greater than I’ve been interested in paying.”
Walmsley says money is still available from local banks to investors who are known and well-regarded in their community. “It’s not what you know, it’s who you know,” he says.
Walmsley asked his mortgage broker to take his financial statement and shop him around to about 50 banks. When the broker finds a bank who might be interested, Walmsley goes in to talk to the banker, who sizes Walmsley up to see if he would make a viable business partner. “It’s going to come down to whether the investor has enough money, enough background, and enough credibility to pull a deal off,” he says. It’s most important that investors have prior experience in apartment investment, he says. “It’s more about you than it is about your credit score.”
Instead of putting all his money in one bank, Walmsley also is putting his money into other banks with which he hopes to do business.
More Equity, Less Debt
Real estate loans that are available may be more conservative—investors might have to put down 30 percent in equity instead of 20 percent, for example. But investors who are hesitant to invest 30 percent equity in a purchase are missing an opportunity, Walmsley says.
A community that cost $2 million last year would require a 20 percent down payment of $400,000. That same community might cost $1 million this year, so even a 30 percent down payment is only $300,000. Even if the NOI of that community is less, the investor will still see cash flow because of the lower debt servicing payments. Plus, the community has the potential to rise again in value.
Special Offer article written by Jeffrey Lee of Units Magazine.
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Huntsville, AL .. August 28-30 2009
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All newsletter subscribers will receive the full presentation with their newsletter next month!!!
Click here If you would like to receive a full copy of the live presentation.
UPDATED FRI 3/27 – DUE TO OVERWHELMING DEMAND THERE WILL BE A REPLAY OF THIS PRESENTATION VERY SOON. STAY TUNED FOR DETAILS!!!
You’re invited to watch a LIVE PRESENTATION tomorrow Thursday at 11am EST from the Private Money Magnet Boot Camp that’s currently taking place in Boston – On the panel discussion, Dave and his students will discuss the private money deals that they have done in the past 6 months. You’ll also get a LIVE sneak peak into the boot camp!
Click here tomorrow Thursday at 11am Est to view the LIVE PRESENTATION!
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