I was talking with Frank who was a newbie apartment building investor. He told me he would seriously start looking for deals (i.e. making offers) once he had enough money to invest. But he couldn’t really tell me when that was going to be.
He said he couldn’t see himself putting a building under contract right now because he didn’t have the money to close. Who would take him seriously?
Frank had trouble seeing beyond his own reality, and so I suggested an alternate perspective. What if he raised money from friends and family?
He wasn’t sure how that would help. And besides, his friends and family didn’t have any money anyway.
I hear these objections to getting started with investing in commercial real estate all the time. People don’t have the money, and so they’re stuck. Looking off into the distance they mumble “some day”.
The truth is, you don’t need tons of your own money or good credit to get started with multi-family property investing. The secret to getting started now is to raise money from private individuals.
- You don't need your own money. I hate stating the obvious, but since the lack of money is the biggest objection to getting started with apartment investing, it deserves to be stated plainly. Just to re-emphasize this point, if you raise money from investors you don’t need to use or have any of your own.
- You can get more (and bigger) deals done. Even if you have your own money to invest, there is only so many deals you can get done. On the other hand, if you are able to raise money from others, the sky is the limit. Your ability to accumulate property is then only limited by your ability to find good deals. The ability to raise money is an incredibly valuable skill to have. With the backing of investors, you can go after bigger (and more lucrative) deals than just using your own funds.
- You have more eyes on the deal. Richard Feynman, the famous physicist, once said that “the first principle is that you must not fool yourself and you are the easiest person to fool.” When you’re using your own money, no one else is looking over your shoulder, and you’re more likely to make mistakes. If you can convince others to invest in your deal, chances are, you actually have a good deal.
However, there are some disadvantages to having investors:
- You now need to report to your “bosses”. Chances are you’ll have to report to your investors in one form or another. You may have to give updates and financial reports to your investors to keep them posted. This certainly is more work than if it were just you in the deal. On the other hand, analyzing the Profit & Loss (P&L) statements and sending out reports make you pay more attention to the deal. You should do the same if there are no investors, but few of us have this kind of discipline, and as a result we don’t pay as much attention to the investment like we should.
- You may lose some control. You may not be able to make all of the decisions without a vote from your investors. As I’ll discuss in later posts, there are ways to mitigate this risk with how you structure the deal.
- You won’t get 100% of the profits. That’s true, but as the saying goes, 100% of nothing is still nothing. If you can own 100% of the building by using your own money, great! But if not, use investor money and get in the game!
All in all, though, the advantages of using other people’s money far outweigh the disadvantages. This doesn't mean you shouldn't use as much creative financing as you can (especially seller financing). Bottom-line, if you get skilled at raising money from others (like Donald Trump!), you can get started with investing in apartment buildings (and other commercial real estate) TODAY.