How do i get started?
HOW DO I FIND A LOCAL REIA CLUB AND WHY SHOULD I GO?
FROM TOM NARDONE, MILLIONAIRE MAILMAN…
I get the question about REIAs all the time from students…
Well, REIA clubs have been around since the late 1980s. If you’ve never been to a local REIA club (Real Estate Investment Association) in your area, you should go. It can be a valuable place to network with others and build your Power Team.
WHERE DO YOU FIND ONE?
Start by going to the National REIA website. Look up a club in your local area, and even if it’s a 2-hour drive for you to attend (assuming you live out in the boonies) – it’s usually worth the drive.
There is typically a small fee of between $5 to $20 to get in at the door. Many 1st– time guests usually get in for free on the first visit, but that depends upon the club. Then there is usually a monthly fee to attend or a discounted annual fee to join for the year.
What’s in it for you? There is typically a lot of networking going on and the opportunity for you to meet other investors, so bring lots of business cards with you.
Most REIA clubs have corporate members. These are members who get to ‘pitch’ their business services to the club and explain what their business can offer the room of investors. Obviously, it’s worth saying again – this is another reason why REIAs are a great place to look for people to build your Power Team.
You will typically see:
- Real Estate Lawyers
- Title Companies
- Mortgage Companies
- Hard Money Lenders
- Inspection Services
- Termite and Mold Remediation Services
- General Contractors
- Insurance Companies
- Property Wholesalers
This you’d want to business with those types of people? Um… yes!
And, there is usually a main speaker or guest speaker who could be local or from out-of-town talking about a nifty service or software or market approach to finding and closing deals that gives you a unique advantage to the market.
HERE’S HOW I KNOW…
From 2005 to 2011, I was on the REIA club circuit speaking at most of the larger clubs around the country to offer my ideas of networking with mail carriers, who could become your bird dogs to find deals that no one else can find.
That was my niche on how I got started in real estate investing, which was by finding deals on my mail route as a carrier. True story, hence the name “Millionaire Mailman.”
Speaking at these REIA meetings gave me the chance to meet people all over the country and make a lot of great connections – many of which I still have today! I had a lot of fun educating people and made life-long friends in the process.
You can do the same without having to travel around the country – you can do it on a local level at a REIA club near you
I still attend local meetings in South Florida, and every few meetings someone tells me about a house that turns into a deal that I close and make a nice profit on.
So, visit your local REIA club and get plugged in.
Enjoy the Journey!
How to by Apartments
Having your investors committed before you even put a property under contract is critical when syndicating apartment building deals. Without upfront commitments from investors, you won’t be able to submit offers confidently and it will be difficult to get the money in time to close.
This “catch-22” keeps most real estate investors on the sidelines. This frustrates me because it doesn’t have to be this way.
Last week we talked about Why You Should Raise Money to Buy Apartment Buildings. This week I’ll share with you a secret that will let you raise money from private individuals long before you have a deal under contract.
This means you can get started today, right now.
The secret is so secret that I’ve never heard it revealed anywhere else.
The secret will stun you
The Secret Revealed
The secret to getting financial commitments from your investors long before you have your first deal under contract is to … make a up a deal.
You “make up a deal” by creating a “Sample Deal Package”. This document contains everything about your fictitious deal including photos, information about the building and area, actual financials, your business plan, projected financials and returns. You will use this Sample Deal Package to speak with potential investors. You will even use it to build credibility with other professionals you’re trying to recruit to your team (like commercial real estate brokers, lenders, insurance agents, attorneys etc).
The difference between a Sample Deal Package and a real one is that all of the information about the deal is accurate (photos, location, financials, etc), except that you don’t have it under contract. The other difference is that your fictitious purchase price may be lower than the asking price so that you achieve the desired returns for the investors. In other words, you approach your potential investors with a deal package that looks like the real thing.
But how do you create such a Sample Deal Package?
Find and re-purpose the marketing package for a listed property and turn that into your Sample Deal Package. It will contain an executive summary about the building, investment terms and potential returns; information about the building and area; photos; actual financials; projected financials; potential estimated returns for the investors; and information about yourself and your team.
Where do you get all of this information? One good (free) source is www.loopnet.com, which lets you search for the kind of deals you want to do. Download a good marketing package and get to work.
Having this Sample Deal Package does several things for you:
- It allows you to better visualize your deal. This is critical as you expand your own comfort zone with doing your first commercial real estate deal, or doing bigger ones than before. Seeing the photos, visiting the property, writing and talking about it make this deal real for you. The more real it seems to you, the more comfortable you become and the more confidently you can talk about it.
- It empowers you to get startednow. You can now schedule meetings with potential investors and say, “I don’t have a deal right now, but when I do, it’ll look substantially like this” and then you show them the Sample Deal Package. It gives you something to talk about today.
- It will allow you to get financial commitments from your investors long before you actually have a deal under contract. By the time you get a building under contract, you’ve already primed your investors and received financial commitments based on a deal substantially similar to that in the Sample Deal Package. When you actually have a property under contract, you will send your investors the real Deal Package, re-confirm their commitment and close on time.
Creating a Sample Deal Package allows you to get started NOW with apartment building investing. It allows you to better visualize your deal, gives you the confidence to make offers, and secures commitments from your investors long before you put your first property under contract so you can close on time.
In later weeks we’ll talk more about what how to find potential investors, how to conduct your first meeting, what investors look for, and how to structure the investment.
In the meantime, I’d love to hear your thoughts about how you think this “Sample Deal Package” approach would work for you.
How to Structure Syndicated Investor Deals
I appreciate all of your comments and questions to previous articles because it gives me fodder for articles that you’ll hopefully find helpful.
One of the questions last week was about how to structure deals with private investors.
This is a complex topic, and one that I can address a little bit over time. This week, I’d like to focus first on what investors are looking for in an investment. By this, I mean what kind of returns are they looking for. Once we understand that, we can talk about how we can structure our investments to try to satisfy our investors’ requirements (we’ll leave that for a later article!)
For this discussion, I’m going to assume you’re looking for investors for a larger buy and hold deal like an apartment building or other commercial project.
What Do Investors Look for in a Commercial Real Estate Investment?
The first thing you need to address is the risk level of the investment. Investors first and foremast care about not losing their money. Brandon talked about this in some detail in his article “The One Simple Thing Required to Raise Unlimited Money From Private Investors“.
Once they’re comfortable with the perceived level of risk of the deal itself and you as the principal, you can address some of the other aspects of the deal, which are the (1) projected returns and (2) how to structure the deal.
In this article, I’ll focus on (1) the projected returns, and next week we’ll talk about (2) different ways to structure the deal.
Here are the three questions investors will have for you about the deal:
- When will I get my money back?
- What will the overall return be?
- How much will I get paid throughout the year?
Let’s talk about each in turn.
When Will the Investor Get His Money Back?
Investors want to know how long you plan on keeping their money, or when they will receive their principal back. They will want to know what precisely your plan is for returning their principal. The answer to this question normally involves a liquidation event, either an outright sale of the asset or a cash out re-finance.
I insist on a minimum 5 year commitment before entertaining a repayment of the principal, longer is even better. Unless you’re doing a gut-rehab or re-position project where you’re adding significant value in a short period of time, 5 years is a reasonable amount of time to build good value for all involved.
If an investor insists on a shorter time frame, you need to move on. Keep in touch with the investor when you find a more suitable project.
What is the Overall Return?
Investors want to know what their return will be over the life of the investment. The overall return is a combination of cash flow distributions, paying down the loan, and appreciation of the property as realized by a sale or cash-out refinance. You add all three “profit centers” together, and you can project the overall return.
You can take the overall return over, say, 5 years, and divide by 5 to get the average annual return.
I always consider this the most useful and easily understood way to articulate overall return. You can calculate the Internal Rate or Return (IRR) which is the more “sophisticated” way to calculate the return of any investment over time, and your more “sophisticated” investors may actually use this as a criteria.
However, I’ve found that my investors (who range from completely non-sophisticated to fairly sophisticated) respond better to the average annual return – it’s just easier to understand.
What Kind of Return are Investors Looking For?
This depends on the current market environment, i.e. what are CD rates and the stock market doing. With a somewhat flat and uncertain stock market and negligible interest rates, I have found that investors are very interested in overall rates of return of 8% – 15%.
I used to think I needed to show returns of 20% plus, but those kind of deals were extremely hard to find. Not only that, my investors actually got suspicious at the very high return. “Wow, that’s a pretty big return, so, it’s a pretty risky investment, huh?”.
For both of those reasons, look for overall returns of around 12%.
How Much Will the Investors Get Paid During the Year?
While most investors care about the overall return, they also enjoy being paid during the investment, which I will refer to as “distributions”. The return from distributions is usually measured in terms of the “cash-on-cash return”, which is the percentage of distributions per year divided by the capital invested.
I have found that investors are typically happy with a 3%-8% cash on cash return.
Let’s say you take $100,000 from two investors to buy an apartment building. If you projected a 5% cash on cash return, you are saying that you plan to distribute $5,000 per year out of cash flow to your investors.
That number is after all expenses are paid out (including debt service) and must also take into consideration any distributions to you.
Preferred Rates of Return
Sometimes you can offer to investors a “preferred rate of return”, which means you agree to pay out a certain minimum before you get paid anything. Investors of course prefer this, but it is not as good for you.
For our previous example, if you agree to a 5% preferred rate of return, it would mean you pay out the first $5,000 to the investors. Anything that is left over is split according to how much equity each investor has.
Normally, the higher the preferred rate of return for the investors, the less equity I give them.
One option is no preferred rate of return, but the investors get 80% of the building. Option two is that the investors get a 5% preferred return but only get 30% equity.
I generally don’t want to give a preferred return but investors prefer it. You need to test these options with your investors to see what you need to do to get the deal done.
Be Conservative in Your Projections!
I can’t emphasize this point enough. It is far better to under-promise and over-deliver than have to explain to your investors why you missed your (originally aggressive) projections.
After you address your investor’s fear factor (i.e. making them comfortable with the risk of the investment), then you need to confidently address their “greed factor”, i.e. how much money they can make. Show your investors a solid real estate deal with reasonable returns and a conservative business plan, and you will attract capital to do as many deals you want.
How to Find Investors To Fund Your Real Estate Deals
I’ve been writing about buying apartment buildings with money from private individuals. In a response to my last article “The # 1 Secret to Raising Money to Invest in Apartment Buildings” “how do you find local investors that are interested in discussing deals?”.
Great question, let’s talk about it!
For several years before getting involved with investing in apartment buildings, I was renovating houses, fixing them up and reselling them. To finance these “rehabs”, I raised the money from friends and family. The minimum investment was $25,000 and paid I them 12% to 15% simple interest, guaranteed by the house. The title companies took care of the promissory note and recording the deed. As I was eyeing commercial real estate, I polled my existing investors to see which ones were interested in buy-and-hold commercial real estate.
I was disappointed to find that only a few of my existing investors were interested. However, I found that people I knew were able to refer me to people who were interested.
The lesson here is not that you should start small first (with rehabbing houses, for example) before moving into commercial real estate. Rather, the lesson is that you should leverage your existing sphere of influence to achieve what you’re looking for – in this case, to raise money for apartment buildings or doing flips.
In short, the lesson is to talk to everyone you know.
It’s surprising who your family, friends, neighbors and co-workers know. Never discount anyone – tell everyone you know what you want to do and you will be surprised at what will happen. If someone refers you to someone they know, always follow up. Even if that person will not invest, she may invest later or she may be able to refer you to someone else.
The conversation might go like this after you dispense with the small talk:
You: “I’m working on something new, maybe you can help.”
You: “I’m looking to buy an apartment building in the metro area with a group of investors. The annual returns are expected to be around 13% and the minimum investment is $50,000. You wouldn’t happen to know anyone who might be interested, would you?”
Susan might say, “Well, I might be interested,” or she might refer you to someone, or she might say that she doesn’t know anyone.
If she is interested herself, schedule a meeting with her. If she knows someone, have her make an introduction and then follow up with that person. Make sure you keep Susan informed about the progress.
Your goal is to have as many in-person meetings with potential investors as possible.
Keep these tips in mind:
- It’s important that when you invite someone to that first meeting that you say what the minimum investment amount is. Otherwise, if you’re looking for a minimum $50,000 and the person only has $10,000 to invest, you’re wasting everyone’s time. By the same token, if the other person accepts the meeting, then they’re implicitly saying that they are capable of and potentially interested in investing at that level.
- Don’t “discriminate”.Often it’s impossible to tell who has money and who doesn’t. It’s amazing how much “little old ladies” have stashed away in their IRA accounts. Similarly amazing is how little money the flamboyant stock broker neighbor next door has to invest in anything besides his boat and second house.
Therefore, “EVERYONE” is the key: Talk to everyone, ask everyone for a referral, and follow up with everyone.
If you talk with everyone you know today, and follow up with referrals, you will be amazed at how much money you’ll be able to raise to invest in apartment buildings.