Having a real estate property is an investment each and every person would like to have at least once in their lifetime, but not everyone is lucky to have enough funds to buy, develop and maintain them.

In this article, Corey Peterson will discuss how it works, how to maneuver these funds and of course, how to get your deals done. Cashflows are exciting and mostly appreciated, especially from those who started with nothing and became successful.

Capital Stack

Capital Stack – also known as bank financing, it is the total amount of money it takes to buy a deal. When you’re underwriting, you want to always start with .75. In other words, you’re going to be able to get a 75% loan to value from a bank. It could be less, depends on the market. All that is determined by the current occupancy. The higher your occupancy is, the better chances of getting your loan approved. Checking your portfolio and seeing that the property will have above 85% occupancy will probably allow the best loan to value which is 80%, but never use 80% as an initial underwriting guideline. Only get and put down the 80% after the bank approval at 80%.

Initial underwritings should always be conservative. Bank money is always cheaper. You always want to get as much bank money as you can.

Since capital stack funds the 75% of the total amount you’ll need, there will still be 25% that needs separate funding. This is where private funding comes in. But still, funding your real estate doesn’t end here. There’s still a need cover all the closing costs, legal costs, inspection costs, everything that’s going to cost in your deal. All of these costs would need funding as well.

Cap-Ex

Cap-Ex or Capital Expenditures – is the amount of money you’re going to use to fix up the property. In single family fix and flip, it is called rehab money.

There are times when people are selling properties for a certain price rather than develop or fix the property. The reason is most of the time, they have no extra money. They’re out, they’ve spent all their money and they didn’t get to complete the project, or they let their property deteriorate to a point where now they can’t get the money from operations.

Find all the right problems in that property that are fixable, fund it 100% with bank financing and other people’s money to get the other piece, plus all the money that will need to bring to the deal.

Acquisition Fee

An acquisition fee is typically between 3% to 5%. On average, we usually charge 4%, sometimes 5%, it all depends on how good a deal we’ve found. On a typical $2 million deal, times 4%, that’s $80,000. We call these immediate profits. Investors want to get their money back with interest. All they want to see is the full numbers and understand what you’re doing, how we’re going to underwrite the property.

Other People’s Money 

Private Lenders, although with higher rates than banks, we also need to understand where these people are coming from. When you go to a stockbroker, or a financial advisor and you want to place a race on an investment, they typically take a commission. Because they are the ones who operates funding and structuring the deal, putting everything together, it is very normal and very acceptable.

When you start getting good deals, a fat deal that turns out to become a skinny deal is much better than a skinny deal that becomes skinnier. Take that fat deal instead.

Stay true to the numbers. When you do that, and you’re consistent with it, family, friends, relatives may reward you with sharing other contacts who can help you with your funding. They give you all the referrals of other people’s money. This is the relationship business. It starts with friends and family, it really does.

Don’t get discouraged when you’re raising private money and you ask people for it. It helps take the pressure away.

Never fine tune your numbers until it’s almost ready to close

Pencil a higher interest rate. If the deal still works at these numbers, under promise and over deliver. Be conservative, but do better. So then when it comes time to show your financials each and every month to the people that matter, your investors, you’re constantly showing them better numbers and makes them believe and trust you more. Your investors in this business will give you everything you absolutely need.

Commercial Mortgage Broker

A professional help from a commercial mortgage broker goes a long way. Looking at your deal, looking at your numbers, he’s going to be able to give you some really sound advice in the structure. Sometimes, a better option if capital stack is not available. They’re going to give you a bridge loan, it’s a high interest rate loan, it’s not hard money but it’s definitely more expensive because it’s riskier, and there are more controls on it.

Never undervalue the benefit of asking for help. That’s the business of finding good referrals, you ask lots of hard questions, but you first go find your friends, ask your friends, ask your network, ask people, see what they know, who they know.  Keep expanding your network, be the conductor of your team but keep it simple. Take all the pieces that you need and assemble them to make the team.

Sometimes, you may not have all the credit, you may not have all the capital, but the great thing about this business is that you can put it all together and package it in a loan and it’s totally fine, it’s totally acceptable in the structure of multifamily deals. It’s really just how you put the jigsaw puzzle together to find the solution, make it a win-win for everybody, and guess what? You get to do real estate. That is living the paradise life, that’s the legacy wealth that we’re talking about

Again, if you haven’t done so yet, go to kahunawealthbuilders.com, download the Quickstart Video Series. You’re going to need this video series because it goes over, in detail, how to find deals and how to raise that elusive ‘other people’s money.’