How to raise money for multifamily property investing is usually the biggest concern for investors who are looking to level up to multifamily.
It is also a huge challenge for those of you who are experienced syndicators; you know all too well that finding the money to finance your deals is often the biggest challenge.
So whether you are trying to go it alone or you will be heading up a joint venture or syndication and need to find interested investors, this article contains something for you.
You are, no doubt, already convinced that the scalability of apartment properties means that multifamily investment is the way forward. Rather than acquiring properties one by one and growing your business at a snail’s pace, one purchase at a time, with multifamily you acquire multiple properties within one building.
So now that the focus of your investing future is clear, how do you go about getting the dollars to match those deals?
“Do you need to raise money with syndication or without?” click: With Syndication and Without Syndication (add link)
Raising Money for Multifamily Property Investing With Syndication
Attracting Passive Investors – The Foundation
First, let’s talk about the foundation of raising passive investor capital.
Experienced investors speak about the danger of looking at every contact and connection in your network as a dollar sign.
You need to give people the chance to build a relationship with you and to build trust.
The best way is to speak with people in your network with enthusiasm about the deals you have done and the deals that you are doing and when they respond with enthusiasm then you can take it from there.
Attracting passive investors is not just about making connections, you may attend an event and make a lot of connections and gather a lot of business cards. It is also vitally important to follow up and build on that initial contact before the connection grows cold.
Attracting Passive Investors – Be a Thought Leader
To greatly extend your network you need to fully embrace digital marketing.
Position yourself as a thought leader in the real estate investing world by producing lots of valuable content across multiple platforms using different mediums such as blogging, videos and being a guest on or even producing your own podcast.
Have a way to capture those leads once they start coming in. If you are directing people by means of your content to your website, make sure that you have a lead capture form and offer something of value in exchange for that potential investor’s email address.
Once you have a contact, reach out and start to build that relationship by means of more engaging content.
Once an investor is on board you can then use this same software to provide ongoing reports to your investors.
Attracting Passive Investors – Use Technology
Once you have engaged investors to the point where you can interest them in a deal, you can use one of various software platforms that can help you to onboard the investor.
Experienced investors are using a software platform called Active Campaign for targeted email marketing, marketing automation, CRM and messaging.
Attracting Passive Investors – What to Say
In your conversations with investors, your objective is twofold.
Your first objective is to increase their confidence in you and your deal, and your second is to see if the investor is right for you.
Explain to them that you are in this together with them and if you have money invested you can tell them that you also have ‘skin in the game.’
Even if you are not investing your own money in the deal for whatever reason, you can still reassure them of your 100% commitment.
You can talk about your track record with potential investors and if your track record is not so convincing then you can speak about the track record of your partner and that of your team.
Ask them questions about what they invested in before and what they liked and disliked about the way that investment worked out for them.
Some investors will be happy to wait patiently for returns and others have different expectations. It’s good to find out about what type of investor you are dealing with.
If you have your investors’ best interests at heart and ensure that the deal is right for them, then you will also be saving yourself a lot of headaches later on.
Raising Money for Multifamily Property Investing Without Syndication
For those of you who are yet to scale up to multifamily, I know what you are thinking, yes multifamily makes sense but the numbers are so much bigger, starting with the funds required to purchase this kind of property.
This article will help you see that it’s not so difficult to source the kind of funds you need to make the transition or indeed even to start your investing career with multifamily properties.
Conventional Mortgage and Other Common Multifamily Financing Options
If you have a good credit score, why not simply arrange a mortgage. You may be surprised at how easy it is to qualify for very large sums.
Banks are more inclined to approve loans for multi-family properties than single-family properties.
Due to the nature of a multi-family property, rents are received by more than one person. The risk for the bank is distributed.
However, it is important to be aware that the bank will likely require a minimum of 20% down payment.
To get the 20% down payment you might think about a home equity loan if you already have a home that you own a percentage of.
That percentage is your equity in the house. You can get a loan of up to 80% of that value.
Conventional Mortgage – Terms between 15 – 30 years. Loans are capped at 80% LTV and typically have interest rates between 4% – 6%.
According to Green Light REI podcast guest, Geoffrey Platt from Arbor, the qualifications for a loan on a small multifamily apartment include the following:-
- A credit score of 680 (Fannie Mae) or 650 (Freddie Mac)
- At least 2 years of multifamily ownership/management experience. (5 units or greater at a single location), (If you do not have that level of experience then the building should be managed by a third party professional management company.)
- The building should have a record of at least 90% occupancy for at least 90 days. (Otherwise, you may still qualify for a bridge loan at a higher rate.)
- Your net worth or the net worth of you and your partner combined must be equal or greater to the loan amount. (Or a party who is worth that much must sign the loan.)
Other common financing options are:-
Government-Backed Loan – Terms between 5 – 35 years. LTV capped at 87%. Interest rates between 3% – 6%.
Portfolio Loan – Terms between 3 – 30 years. LTV of up to 97%. Interest rates from 3.70% – 5.70%.
Short-Term Multifamily Financing – Terms between 1 – 3 years. Interest rates of 4% – 12%. Monthly payments are typically interest-only.
Friends and Family
Approaching friends and family may seem like a last resort as it’s no great revelation to say that many relationships have been put under a lot of strain due to business dealings.
The way to ensure that the relationship stays healthy and positive is to make sure that communication is clear and that everything is down in writing.
This may not necessarily be simply a question of trust but it is also an essential step because it prevents misunderstandings.
Make sure that all agreements even with family and friends are written up and signed properly thus protecting all parties and guarding against any potential ill-feeling down the road.
Your friends, family, neighbors, and co-workers trust you because of the ethics that they have observed in you over the years.
In 2017, the real estate crowdfunding community raised and placed an estimated $5.5 billion in debt and equity capital in real estate.
The World Bank predicts that global crowdfunding volume including real estate will reach an amazing $93 billion by 2025.
Crowdfunding is where small investors pool their money and invest it as a group in larger investment vehicles that would normally be out of their financial reach.
The investment is generally managed by the crowdfunding platform.
To balance their portfolios investors are actively looking for alternative investment opportunities.
This means increased access to capital for multifamily investors as well as increased competition resulting in more competitive financing.
A great benefit of crowdfunding for multifamily real estate and commercial properties is that some platforms offer pre-funding.
Pre-funding means that the crowdfunding platform can sometimes fund the deal in a matter of hours.
This will only happen of course, if they believe that the deal makes sense and that they will be able to comfortably raise the capital from their pool of investors.
Private Money Lenders
By private money lenders, we are referring here to individuals not affiliated with a financial institution.
Sourcing private money lenders is not as difficult as you may think; there are many of them out there.
The difficult part is convincing them that yours is the right deal for them to fund.
They will want to know, what are the incentives and what are the risks?
They will want to know how their investment will be secured and protected.
Connecting with private money lenders will happen naturally as you grow your network both within and outside the real estate community.
In the meantime, as your network grows, you may wish to look into private lending companies.
These may have different terms for agreeing to work with you than a private individual.
Try the following companies, Lightstream, Upstart, Lending Club, Citizens Bank, and Best Egg.
So now you have an idea of how to find the dollars to match the deals that you are finding on platforms like:-
LoopNet, Showcase, TenX, Apartmentbuildings.com, CREXi, Point2Homes, Trulia, CityFeet and Realtor.com.
True you may not always find the best deals directly on these sites but through these platforms, you can connect with brokers, create rapport with them and then try to get a look at their best deals.
For that, you will need to convince them that you know your stuff and that you are not a time-waster.
So continue plugging away with your education and your future will be bright!