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Objection 3: “I need a higher purchase price” When you hear this objection, you need to remember one thing: The neat thing with real estate is that there are so many different ways to structure your profit in a transaction that you can often give the seller exactly what she wants and still make a healthy and significant profit for yourself. For example, one of the things that you can do is give the seller her price but make sure that you get terms that are good for you. Those terms will help you make a good profit on the property. Use these language patterns to create a context for them to give you a great price on the property. Here’s what it would sound like: Investor: Well, you’re asking for $974,000 for this property Mrs. Seller. What did you realistically expect to get out of the property? Seller: $974,000 — that’s my asking price. Investor: What did you really expect to get out of the property? Seller: $900,000. Investor: That makes sense. If a broker brought you a buyer who was will- ing to pay that full asking price of $900,000, you would probably say no, correct? You would probably turn it down? Seller: No, I’d sell it anyway — if he would want to buy it or sell it with an agent. I’ll sell it to anyone who wants to buy it. (This allows you to then discount the price further by subtracting the amount the seller would be willing to pay to a real estate agent.) Operating the Wraparound Mortgage Like a Surgeon When you’re buying a property subject to the existing financing, one of the seller’s biggest concerns is that if you don’t make the payments on the first mortgage, the seller is going to be liable for the default on the existing loan. When you’re selling a property, you’ll have the same concern if you’re leaving the existing financing in place and carrying back a second mortgage. To protect the seller’s interests and give him the comfort level that allows him to move ahead with the deal, you can use something known as a wrap- around mortgage. In some places, this is known as an “AITD,” which stands for “all-inclusive trust deed.” To keep things simple here, we refer to these as wraparound mortgages. To understand how this mortgage works, here’s an example: Say that you’ve negotiated with the owners of a small strip center to purchase their property 172 Part III: Funding Your Deals: Financing and Lending 15_174913 ch09.qxp 11/21/07 4:34 PM Page 172 subject to the existing financing and the owners are willing to carry back sec- ondary financing to help you get the deal closed. Here’s what the numbers look like: Purchase price: $2 million Down payment: $200,000 Owner carry second: $300,000 Existing first mortgage: $1.5 million The owner carry second in this example is going to be written up as a wrap- around mortgage. The reason it’s called a wraparound mortgage in this case is that this mortgage is going to “wrap around” both the owner carry second and the existing first mortgage of $1.5 million. The way this works is simple: The paperwork is set up so that you send an amount equal to your payment on the owner carry second and your payment on the existing first mortgage directly to the owner. Here’s where it all starts to make sense: The owner then takes the amount necessary to make the payment on the first mortgage out of the money that you sent and forwards it to the first mortgage holder. In this case, the owner is protected because he’s able to make sure that the payments are made on the existing first mortgage before they’re made on the owner carry. In addi- tion, if you don’t make the payments to cover both the first and second mort- gages (which are really wrapped together in one mortgage now), the owner has the right to foreclose against the property. This way he protects his inter- est in his owner carry second and any liabilities he may have from the first mortgage. Using an Option to Buy Options are simply an agreement with a property owner that gives you the right to buy at a set price for a certain time period. Sellers will give you an option in exchange for an upfront payment, ongoing payments such as cover- ing the property taxes for them, or as an extra something that was perhaps thrown in along with another property that you bought from them. Thomas, who is one of our Commercial Mentoring Program students, was doing a small land development project. He had found a piece of land that was an “infill” project in the town that he lived in. Instead of buying the prop- erty outright, he arranged to control the property using options. Thomas found a friend of his who had a self-directed IRA and was willing to provide the money the seller wanted in exchange for giving Thomas an option to buy based on the current value of the land. This purchase price for the property was close to $500,000. But instead of coming up with a down 173 Chapter 9: Getting Creative with Financing 15_174913 ch09.qxp 11/21/07 4:34 PM Page 173 payment and having to make mortgage payments, Thomas set up a series of option payments over time. The first payment of $5,000 was due after his 90 day free look period. This bought him another 60 days to work on getting the approval to build on the property. Every 60 days from that point forward Thomas owed another payment. He was able to negotiate so that each option payment went toward his purchase price. By the time Thomas got the final approval to build on the property, the total amount invested from his friend’s IRA was just $80,000. He was able to pro- vide a high rate of return to his friend. This was way more than he would have made with his money sitting in a traditional IRA account. With the approvals in place to build, the value of this land had jumped up to almost $1 million. After all of his costs, Thomas will clear several hundred thousand dollars on this one deal. Are you starting to see the power of using options? Leveraging the Equity in Your Portfolio Another creative financing technique that you can use is to tap into the exist- ing equity that you have in commercial or residential properties that are already in your portfolio. Employing blanket mortgages One of the very first “no money down” deals that coauthor Peter Conti did was put together with a blanket mortgage. The owner of the property ran a small construction company, and he simply wanted to get rid of the apart- ment building he owned. All Peter had to do was come in and assume the existing mortgage and take over the payments. Now understand that at this point, Peter was no Donald Trump. He didn’t have a huge track record or lots of money in the bank to convince a lender that it was okay for him to go ahead and assume alone. However, Peter did have some other properties he owned. He was able to put these up as additional security to convince a lender to go ahead and allow him to assume the loan. The key in using blanket mortgages is knowing when it’s absolutely necessary. You never want to cross-collateralize properties unless you need to. One of our Commercial Mentoring Program students named Mike came across a small classified ad for a 20 unit apartment building. After calling the owner and getting the details Mike ran through a quick analysis of the property. He could see where even if he ended up paying the price the seller was asking the building would make money from day one. Mike sat down with the owner and got to know him while creating a good connection. Mike found out that 174 Part III: Funding Your Deals: Financing and Lending 15_174913 ch09.qxp 11/21/07 4:34 PM Page 174 the seller was upset because all the other investors were contacting him with low offers. The seller had worked hard for many years to build up his prop- erty and was disturbed by all the people who wanted to beat him down on his price. Mike decided to offer a blanket mortgage to get the seller to carry back 100 percent of the financing for his purchase. At this point, Mike has over $600,000 of equity in this property that he bought without using any of his own money. Be careful when you’re dealing with blanket mortgages, because you really are pledging your equity and those other properties. If something should happen on the property that you purchased using a blanket mortgage, the seller or other lender will be able to foreclose not just on the property that you purchased, but on the other properties as well. Drawing on 401(k)s or IRAs One of the best sources of secondary financing is money from other people’s IRAs. This concept may seem strange, but stick with us on this one. In order to provide loans for you to buy real estate, the only thing a person needs to do is move her IRA from a traditional account to something known as a self- directed IRA account. The only difference is that with a traditional account, the institution decides how to invest your money — usually in stocks or bonds. With a self-directed IRA, your new friend can decide where that money is going to be invested. To get started with this technique, ask everyone you know this question: “Do you know of anyone who would like to make higher rates of return on their retirement funds?” When someone answers that she would, simply give her an application to transfer her funds to a self-directed IRA company. Then keep in touch with her to let her know about potential investment opportunities. Typically, with funds from an IRA, you want to make sure that they’re secured with a mort- gage against the property. Companies that allow you to self direct an IRA are listed at www.realstateinvestinglinks.com. 175 Chapter 9: Getting Creative with Financing 15_174913 ch09.qxp 11/21/07 4:34 PM Page 175 176 Part III: Funding Your Deals: Financing and Lending 15_174913 ch09.qxp 11/21/07 4:34 PM Page 176 Chapter 10 Raising Capital and Forming Partnerships In This Chapter ᮣ Raising capital to fund your investments ᮣ Creating a circle of potential investors for your next deal ᮣ Putting together effective partnerships F or most people, if they’re going to do big deals, they need to raise the funds to make it happen. In this chapter, we explain how to fund your deals without using your own capital. Our favorite method of raising the money needed to fund a deal involves finding other investors who can pro- vide the private funds that you need. When funding a deal with private funds, you need to have the following: ߜ A great deal that you’re excited about and that is under contract ߜ A Rolodex full of people who know you and your character ߜ A system that allows you to get the word out about your pending deal The good news: After you master raising the money that you need to fund your deals, you’ll be unstoppable! The bad news: Getting to this point doesn’t happen overnight. You need to get good at meeting people and finding a way to stay connected with them. Everything you need is right here in this chapter. Identifying the Keys to Raising Private Funds The first key to raising private funds to support your real estate deal is simple: You must believe with all your heart and soul that this is a great deal. In fact, you must believe so strongly in your deal that you would put your 16_174913 ch10.qxp 11/21/07 4:34 PM Page 177 parents’ retirement funds into the deal. You should also be willing to put your own funds into the deal (if you have them). After all, when you’re getting started, putting your own money on the line is a good way to prove to your investors that you’re willing to put your money where your mouth is. This is exactly what we did when we started raising the capital. When funding a deal with some personal funds along with funds raised from private parties, many commercial investors choose to arrange the deal so that the private funds are paid back first — before they themselves get any of their money back. This preferential repayment helps your deal funders know that in order to get your money back out, you have to make sure the deal works for them, too. If you try to convince someone who doesn’t know you that you have a great deal, you may succeed in getting him to accept that the deal is good. But that brings us to the second key to raising private funds: Unless the investors you’re approaching are comfortable with who you are as a person, the chances of getting funding from him or her are slim to none (even if the deal is a winner). If you take the time to get to know that person and earn his trust, you’ll find that most investors will also want to know about the deal — but the real reason they’re willing to fund the deal is because they believe in you. Building Your Rolodex of Potential Investors People who will invest in your deals are going to do so because they know you and trust you. So how do you get to know more people beyond just your immediate circle of friends? Start by finding a way to keep in touch with the people in your Rolodex over time. If all you ever do is add a name, phone number, and address to your Rolodex, and you don’t find a way to create a relationship, the person proba- bly won’t even remember meeting you. Set a goal for the number of potential investors you want to add to your Rolodex every month. Instead of simply focusing on the people who you think have money, open up to the idea that everyone is a potential private deal funder for you. When you’re talking to someone at the store, the library, the gym, the beauty shop, or at your church, use this script: Right now I’m looking at investing in a big _____ [office building, land devel- opment, whatever you may be looking at that particular week]. It’s a _____- square-foot project in _____ [the name of the state, city, or area). This one is 178 Part III: Funding Your Deals: Financing and Lending 16_174913 ch10.qxp 11/21/07 4:34 PM Page 178 probably already funded, but if I come across something in the future that would create a healthy rate of return for the investors I work with, would you want me to at least let you know about it? The next step is simple. Make sure you get the person’s name, address, phone number, and e-mail address. Then make sure that you develop an easy way to stay in touch with the potential investors on your list. Because people need to get to know you and trust you before they feel comfortable funding your projects, you want to create as many touch points, or chances for them to get to know you, as possible. Raising money from private parties involves some strict guidelines. If you do it wrong, you can easily get into hot water by violating the securities laws. One of the special training sessions we did with our mentoring students was called “Funding Deals without Violating the Law.” To see a Web video of this training session, go to www.commercialquickstart.com. We recommend that you speak with a real estate attorney before you raise one penny. Have that person explain to you what you can and can’t say or do in capital raising. The laws are not only strict, but they’re also very complex. Creating relationships with potential investors Do you want your Rolodex full of investors who are eager to fund your deals? Well then, you’re going to have to put in the effort to create a relationship with these folks first. It takes time, but if you do it in a systematic fashion, it’ll get easier over time. Looking to your existing relationships Among your best resources are the people you already know. You may be a bit uncomfortable getting out there and letting them know that you’re going after investing in commercial real estate. But the biggest mistake that many new investors make is failing to tap into the group of people they already know. If you need help approaching people you know, you can use this script: As you may have heard, I’m moving into investing in commercial real estate — things like apartments, office buildings, and maybe even some land development. Because it can be challenging at times, I’d like to ask you for some emotional support if that’s okay with you. If I’m working on a big deal like a $5 million property and I need a little encouragement, is it okay if I call you from time to time? See how easy it is to start the process? 179 Chapter 10: Raising Capital and Forming Partnerships 16_174913 ch10.qxp 11/21/07 4:34 PM Page 179 People like to help other people. Many of your friends will be willing to sup- port you. If you’re feeling confident, take it to the next step by saying: Thanks for your support. So if I came across something in the future that would create a healthy rate of return for the investors that I work with, would you want me to at least let you know about it? Make sure that no matter who you’re using to fund your deal you get the proper paperwork done by using your attorney. This rule doesn’t change if you’re working with family or friends. Treat every investor the same, right from the start — whether they’re family or not. Make sure that your family members have the same expectations as you do from the investment. You may need to spend some extra time with them to make sure that they really understand what they’re getting into. Avoid the rel- ative who says, “Oh skip the details — I trust you.” He may be thinking that he can get his funds back out at a moment’s notice. If he needs that money in six months because his kid has to go to college, well, don’t spend the kid’s college fund on your deals. Let this be surplus money that your relative won’t be upset about if he loses it. Don’t rule anyone out as a potential investor. Sam Walton, the founder of Wal- Mart, was one of the wealthiest people around, but he drove a pickup truck and appeared to be a “normal” person. If you don’t tell someone about the investing opportunities that you run across, you’re doing a big disservice to him and his family. 180 Part III: Funding Your Deals: Financing and Lending Funding from an unexpected source Emanuel is a Commercial Mentoring student who has been a chiropractor for the past 12 years. He needed to create $10,000 per month or more in income to retire. Like most of our stu- dents, Emanuel was in a hurry to change his life. He decided to focus only on big deals right from the start, knowing that he would have to raise funding once he found the right property. It took him ten months to finally get a winning deal under contract. He purchased a 300-unit apartment for $17,000 per unit for a total of $5.1 million. The funding ended up coming from someone close to Emanuel. He was visiting his in-laws on the way to inspect the property and happened to mention it. To Emanuel’s surprise, it turns out they had several million dollars that was just sit- ting there earning 2 or 3 percent interest. When the property sold in 12 months for $30,000 per unit, it will provide a great return for Emanuel’s relatives and pay off a cool $1 million to Emanuel. The lesson is that you never know who may end up funding your next commercial deal. 16_174913 ch10.qxp 11/21/07 4:34 PM Page 180 Knowing where to meet potential investors When you’re trying to beef up that Rolodex, you have to search out people and groups in many different places — not just at work. Here are a few indi- viduals and groups that you can tap into to begin building your relationships and adding names in your Rolodex: ߜ Folks you do business with: You probably work with real estate brokers and lenders on a daily basis. And most of them are so busy that they don’t invest themselves. So, convince them that they can increase their credibility with their clients if they were to invest in the same type of property they’re selling. And of course, they’d be investing with you. ߜ People you work with: You may be friends with your co-workers. If so, make sure that they know what you’re doing if you want them to be potential investors for your next project. ߜ Church or other spiritual groups: If you have friends at your place of worship, make sure those folks know that you invest in commercial real estate. You want them to know what you’re doing so that they’re more likely to be potential investors for your next deal. ߜ Athletic events and clubs: We love to bicycle. And what a great conver- sation piece it makes to talk about what you’re doing during a ride with your buddies. After your ride (or whatever activity you choose), exchange contact information. This works with all sorts of activities, from sports to hobbies. ߜ Mastermind groups: These groups are focus groups, usually business related, that are terrific ways to promote your efforts to serious and like-minded people. ߜ Networking groups: These groups can help you and the other members to refer leads to one another. For instance, we once belonged to a local networking club, called BNI (www.bni.com), that met once per week for breakfast. Everyone got a chance to share what they did and the whole purpose was to refer business leads to one another. ߜ Real estate investor associations: A great place to start “real estate club- bing” would be with the National Real Estate Investor Association (NREAI). This group has established club meetings year-round and nationwide. Check out www.nationalreia.com for a club near you. If you’re talking to someone from one of the previous groups (or just an indi- vidual you know), you may want to use a script like this: With the great weather, I’ve been having a blast with _____ [something you love to do] lately. It’s been crazy, because I’m also looking at a couple of big commercial real estate deals right now, a good-sized apartment building, and an office building that’s downtown. The rates of return are amazing. Say, if I came across something in the future that would create a healthy rate of return for the investors I work with, would you want me to tell you about it? 181 Chapter 10: Raising Capital and Forming Partnerships 16_174913 ch10.qxp 11/21/07 4:34 PM Page 181 [...]... “Making Big Money Investing in Real Estate without Tenants, Banks, or Rehab Projects” ߜ “Making Big Money Investing in Foreclosures without Cash or Credit” Compare these to some of the losing titles that we didn’t use: ߜ “Nothing But Money” ߜ “Big Changes with Commercial Real Estate ߜ “How to Find, Buy, and Manage Shopping Centers” 183 16_ 174 913 ch10.qxp 184 11/21/ 07 4:34 PM Page 184 Part III: Funding... can be a great way to really get to know someone and allow her to get comfortable with you Using executive summaries to nab potential investors After you’ve built some trust with the folks in your Rolodex as prospective private investors for your deal, you need to create a plan to get them interested in your deals And after they’re interested, you need a way to get them to step up and write you a check... Commercial Real Estate ߜ “How to Retire Fast Investing in Commercial Real Estate We send an e-mail to our prospective investors that gives them a choice of any two of the previous reports It’s all automated, so our investors get a response within minutes, which means that we’ve created another touch point If you’d like to look at our reports to use as models for your own, or if you simply want to see how... great at coming up with the vision and the really big ideas ߜ Stan: He’s all about details and numbers, and he loves to play with spreadsheets Creating the Right Teams and Partnerships When Eric and Sara first got started, it was just the two of them Eric was unclogging toilets and doing maintenance, and Sara was doing the books They were filling the buildings and their cash flow was increasing Then we... III: Funding Your Deals: Financing and Lending The value of the team is in finding people who are passionate about an area of the business that you understand is important but you don’t naturally gravitate toward yourself Structuring your partnership If you’re raising more than a few thousand dollars and you’re anticipating working with multiple investors, you’ll probably want to form something called... their investors! Before you feel bad for them, understand that it was a nothing-down deal for them and that now they have the experience to offer a much smaller piece of the pie to their investors than they did when they were first starting out 16_ 174 913 ch10.qxp 11/21/ 07 4:34 PM Page 1 87 Chapter 10: Raising Capital and Forming Partnerships Writing up the agreements to use with your investors Writing... daily and routine maintenance, and last, capital improvements 18_ 174 913 ch11.qxp 11/21/ 07 4:35 PM Page 199 Chapter 11: Property Management: Who’s Minding Your Ship? ߜ An attorney: Evictions and tenant disputes are bound to occur at some time It’s just part of the business we’re in Unless you stay up -to- date and familiar with the local laws involving tenant-landlord matters, we suggest hiring a real estate. .. putting together written information to prospective investors, our cover letter is referred to as an executive summary It’s a short one-half to one-page document that is a compelling and condensed version of your investment opportunity Your executive summary is going to be competing to get the attention of the busy people you have in your Rolodex This means you need to be short, sweet, and to the point... But Sara loves doing that Eric and Sara have a partner on their team who actually loves getting in his car and driving for two weeks across the state looking for deals He enjoys talking to agents and driving to small towns and looking for 20-unit apartment buildings or strip centers They have another person on their team who’s excellent at marketing 185 16_ 174 913 ch10.qxp 186 11/21/ 07 4:34 PM Page 186...  17_ 174 913 pt04.qxp 11/21/ 07 4:34 PM Page 189 Part IV Day -to- Day Ownership and Operations 17_ 174 913 pt04.qxp 11/21/ 07 4:34 PM I Page 190 In this part n this part, we show you how to keep tabs on your important investments by revealing our simple “manage the manger” process In addition, we offer plenty of advice on protecting your assets The part ends with something you won’t find in most investing . Ten-Minute-a-Day Guide to Making Millions in Commercial Properties” ߜ “How to Get Healthy Rates of Return by Investing in Commercial Real Estate ߜ “How to Retire Fast Investing in Commercial Real Estate We. to purchase their property 172 Part III: Funding Your Deals: Financing and Lending 15_ 174 913 ch09.qxp 11/21/ 07 4:34 PM Page 172 subject to the existing financing and the owners are willing to. bit uncomfortable getting out there and letting them know that you’re going after investing in commercial real estate. But the biggest mistake that many new investors make is failing to tap into the group