So could you maybe walk us through a sample deal then? Like how that would go? Like how much money you might need to raise on, you know, say a property that costs $1 million, for example.
Perfect. Okay. So I’m not going to use a property that costs 1 million, because I have this feeling that we need to make sure that the loans that we use are what they call “non-recourse loans”. And if you’re buying something where the loan itself is under a million, it’s really difficult to get non-recourse debt.
And the difference between recourse and non-recourse is basically recourse means they go after the property and then if they didn’t get enough money, then they go after you personally. You’re basically doing a personal guarantee on the loan. And a and a non-recourse means that their only recourse is the property. Only they can’t come after you for anything.
So I just think it’s smart to go all non-recourse debt, which basically means that you’re having to buy something that’s at least 1.5 million at least, so that the debt is that million or more.
So we’ll just maybe say 2 million because that’s easy to go with. Usually the amount that you have to raise, even if you get an 80-20 loan, a lot of people are getting 80-20 loans and some are getting 70-30 loans, 70% the bank pays and you do the other 30%.
So if you had an 80 over 20 loan, here’s what you have to raise on top of it during Covid, which is where we’re recording now, they want you to have a year and a half. They want you to have like 12 to 15 months of reserves of all of your fees and payments and loan and just every expense that you would have to pay. They want you to just keep that in reserves, to keep them protected.
That’s another reason why we’re probably not going to see very many foreclosures in these large multifamily, because the banks are smart.
So you are going to have to raise that, and you’re going to have to raise the down payment 20% or 30%, and you’re also going to have to raise another couple of things. Here’s the three things:
One is all of your CapEx. That’s everything that you’re going to have to do to the property in the beginning. So you might be replacing windows or the roof or the re-landscaping. So that could be hundreds of thousands of dollars, tens of thousands or even a million plus. So you’ve got to just remember all of that stuff.
The second thing you have to raise up front, besides the pre-payments on the mortgage, is you’re going to have to be able to pay the utility deposit, which means that because the LLC that you just started, the brand new LLC, they don’t have… there’s no history saying that that you’ve been in business for a long time, because you generally, when you’re syndicating, you start a new one. So the utility company wants you to pay a big deposit. So you’ve got to raise that also.
And the third major thing that you’ve got to raise besides CapEx and the utility deposit is something for the insurance. So you actually, with these larger deals, they ask you to have prepaid insurance. So like if you buy a house, you might sometimes have to pay three months of insurance. But most of the time you’re just you just have a monthly insurance payment, but not with these larger deals.
So what I’m saying is if the range is that you’re doing an 80-20 loan, you’re probably going to have to raise at least 30%, which is an extra 10%. And that also includes an acquisition fee. So most of us take an acquisition fee when we close on it, because it’s so much work to kind of move them through the pipeline. And so the acquisition fee might be like 3%, but you raise that up front. I guess that’s the fourth thing that you need to raise on CapEx and everything is an acquisition fee.
So you’re going to raise at least 30-35% on a 20% down. And if it’s a 30% down payment on a 70-30 loan, then you’re probably going to raise pretty close to about half of the purchase price is what you’re going to have to raise up front. So on a one on a $2 million property, you’ll raise anywhere from, from, I guess, 600,000 up to about a million bucks. That’s kind of your average.
And then once you know that you can that you can raise like 2 million or that you have pre-commitments of 2 million, you’ll get the property under contract.
Once it’s under contract, you’ll put down what’s called an “earnest money deposit” which is usually 1% of the purchase price. So on a $2 million project that I think is $20,000 isn’t it? Okay. The last one we did was 135,000, but that was like a $10 million property. So yeah, I think it’s only 20 grand is what you’d have to put down.
So then you also have the attorney’s fees, which is usually about another 20 grand. That’s 10 or 12 or 15 for the securities attorney, and then some more for contract attorneys and real estate attorneys. So you’ll have to pay all this up front, the 20 and then the other 20-ish in legal fees.
And then they’ll create the PPM, which is like a… it’s a “private placement memorandum”, almost like going public with your company, but you’re going private with your company. So this allows you to legally raise the money. So we raised we get this private placement memorandum.
Then the next step is to host webinars. So we start talking with our investors, calling our investors, hosting webinars for our investors, answering questions using a real deal package instead of the sample deal package. And and then we start getting commitments for the actual deal. Then you put all of the money, we call it “EBOP”.
EBOP stands for “Entity, Bank account, Operating agreement, and PPM” so those are the four things you need to be doing is EBOP. If you write it down, it’s a it’s a cool way to remember it.
But they will put their money. “They” meaning these are your passive investors. They’re going to put the money directly into an escrow account. This is going to be the bank account for the entity that you’re creating. And you don’t touch that money for anything except for closing on the project.
You’ll raise everything, including your acquisition fee, goes into this bank, and on the day that you close, it all gets dispersed. So you usually get all of your fees back, like the 20 grand that I paid on this $2 million property, the 20 grand that I did my down payment. I get it back. The 20 grand that I did for my legal fees. I get it back. Anything that I paid for all of my due diligence. I get it back. My flights, I get it back.
Plus I get an acquisition fee. So it’s usually like 3%. So that’s going to be about $60,000 that my company will make.
And then you also do the down payment. You also put money in escrow. You also are paying the utility deposit. You’re paying the prepaid insurance you’re paying. You have an account where you have 15 months of of mortgage. All of that is set up and now you start managing the property. Does that make sense?
Yeah, yeah that’s great. That’s lots of things to think about. You know, that if you hadn’t gone through this process before, it might seem, you know, a little overwhelming if you if you just jump into it and didn’t realize all that’s there. So yeah. Great. Great.