This is No. 4 in our special multi-part video mini-series sharing the steps that will help you dominate your deals. And as I’ve said, this isn’t just talk. These are steps that we are using every day, so I can attest that they work.
So far in our mini-series, we’ve covered: your investment personality, exit strategy, how to find deals in your market and how to evaluate them. In this post, I want to dive deep into how we structure our real estate deals with our lenders.
The biggest key to structuring your real estate deal is finding the right money. And that, my friends, is going to make or break your deal—just like a contractor could or like your evaluation could.
How I think about financing a deal:
Since I like to break things down into buckets, here is the breakdown of how I generally look and think about financing the deal:
- My own cash
- Private investor capital
- Hard money
- Institutional capital, or any community bank that will lend you money for construction acquisition financing
Let’s look at the top three in some detail:
When it comes to my own cash I want to protect it. More importantly, I want to leverage it. Leverage is the name of the game when you’re investing in real estate.
So do you think I am going to take $100,000 of my own cash and leverage it, then sit on one project? Probably not. Would I take $25,000 of my own cash, leverage it to go get capital for hard money or leverage that to do a renovation deal? Yes.
That is how you should be thinking. Especially if you want to be able to do your three, four, five or six deals every year. When we’re at a point where that is all we are doing. We’re leveraging our cash, all of it, all the time.
Find out what works for your personality.
Some people may think that’s scary, but that strategy is what works for my personality. So, find out what makes sense for you, and it’s really important you do. If you haven’t written down exactly what your goals are for real estate investing, then … tsk, tsk, tsk! I want you to stop reading this right now and go back to part one of this series and do that exercise. It’s really helpful—especially now.
We are talking about capital, money, financing, and it’s really important we’re all on the same page. OK? Using your own cash is really good to do. You can also use investor capital, whether it’s from a self-directed investor, self-directed IRA, a friend, family member or anybody you’ve built a relationship with. Being able to use that cash as capital is and can be cheaper than going to hard money. You can structure it the same way.
Let’s say the total cost of a transaction—your acquisition plus renovations—is $100,000. Let your investors know you’re going to have skin in the game. So, you’ll bring $20,000 to the table; they’ll bring the remaining $80,000 required and you can cut the deal a bunch of ways:
- You can give them an equity piece.
- You can give them a return on their investment,whether it is 10 percent, 11 percent or 12 percent for the year. We like to offer a good return on investment and make sure their capital is secured to the property. What do I mean by that? What I mean is their investment is secured. They have a lien against the property either as first or second position, depending on how we decide to structure it.
- Hard money. Now, are these guys expensive? Yes, they are. But use that as motivation to get the project done fast. You don’t want to be paying 15 percent, 16 percent, 17 percent interest over an 8-, 9-, 10-, 1-1 or 12-month time frame. That’s expensive. So, the entire reason hard money exists is for you to be able to get into deals fast and get out of deals fast. Use that to your advantage.
Show you want a long-term win-win.
You’ve got to prove to your lenders—whether it’s a private investor or hard money lender—that you’re interested in a long-term win/win scenario. One of the best ways to find these investors is to go to your local real estate investment association and network with some folks. Maybe even go to a meetup, look at a private money lending guide or some of these websites that have these types of lenders. We also have a lender guide in our resources section of Real Estate Deal Talk. Go to our website realestatedealtalk.com or click here.
Well, that wraps up this episode in our mini-series. Keep in mind, structuring your capitol and structuring your deal properly will make or break it. See you next time.
You can access the video episode here:
About the Author
Abhi Golhar is the host of “Real Estate Deal Talk” and Managing Partner of Summit & Crowne. Abhi uses a “value-added” approach to invest in real estate renovation, new construction and development opportunities in the Southeast United States. He actively educates and works with investors to deploy market-driven strategies that yield success. He holds a B.S. in Electrical Engineering from the University of Michigan. You can find him on Twitter, Snapchat, and Instagram – @AbhiGolhar.