Decisions - raising capital

General Real Estate Investing
1

at work, have some time to kill.

well after talking with a very successful RE investor, he convinced me to:

buy investment property cash only

do this by:

raise 100,000 minimum

he basically told me that if he asked me five key questions about rei, that i would not be able to answer any of them. he told me to find out the questions, get the answers - then find investors.

he told me that if i can’t speak the language of investing fluently, i’m dead in the water.

he told me to forget about investing WITHOUT money.

he told me that the 30k that my current partner and i have is a joke and that i should be comfortable with losing all of it if i plan to invest in real estate - IF i invest using banks, loans, brokers etc.

needless to say, this conversation has slowed me down a bit in terms of HOW i am approaching this operation. he told me that the “analysis paralysis” was a bunch of BS.

he told me “if you can’t put together 100 grand, then you do not belong in the business/investment field. Analyze it, know it or shut up.”

Ironically, I felt much better after my talk with him.

I have ideas for raising the capital - any thoughts?

2

Ok, 2nd time today I’ve read the “5 key questions” spiel.

What ARE these 5 questions, anyway?

3

TM,

I think your successful REI is stuck in the great depression. Sinking money into real estate is ridiculous. It is not liquid and has no rate of return. Invest enough so that you have positive cash flow and keep the rest liquid for the purpose of other investments or in case of emergencies. Say for example you need to access to some cash for a great investment that pops up. You have to go to a bank and ask fior a loan and hope you qualify. Other people’s money my friend.

4

well after talking with a very successful RE investor

Define “very successful” and also, successful in what exactly? If it is/was REI, then what type of REI, and was he a “success” before starting out in REI? It’s easy to talk about using all cash when you have an unlimited supply of it. Not so easy when you don’t.

buy investment property cash only

Again, define “investment property”? More importantly, find what WHY you should buy cash only. Simply saying it isn’t enough. Rich (as in loaded with cash) people do buy investment (commerical buildings, large apartment buildings, etc.) properties cash only. They do this because it generates a better return than sticking it in the bank, yet it is as safe, or safer than being in a bank. Plus it gives major tax breaks. People using RE to try to get to the “rich” position don’t fall into that situation.

raise 100,000 minimum

Actually, not a bad idea as long as the goal is NOT to use it to buy ONE property.

he basically told me that if he asked me five key questions about rei, that i would not be able to answer any of them. he told me to find out the questions, get the answers - then find investors

Wow, he didn’t supply you with the questions or the answers. Basically, go fetch. How quaint.

he told me that the 30k that my current partner and i have is a joke and that i should be comfortable with losing all of it if i plan to invest in real estate - IF i invest using banks, loans, brokers etc

Don’t know your market area or investment strategy, so I really don’t know if $30K is a joke or not. If you’re looking at investing in $100K single family homes, then it’s a damn fine cushion. If you’re trying to buy $30 million dollar commerical high rises, then yes, it’s a joke.

While I don’t agree that you should be “comfortable” losing it all, you should be prepared for the possibility. Your investing and starting a business. Both are not guaranteed success. Now, what that has to do with using banks and loans… I think that I would have had to ask.

he told me that the “analysis paralysis” was a bunch of BS

And yet, it’s the major cause of newbies losing deals. Imagine.

Personally, I’d love to have a good conversation with this guy. He’s a hoot.

I’ll have to finish this reponse at a later time, though.

Raj

5

Now, let’s look at this a little closer.

I won’t get into rate of return, time value of money, and all of the other detailed analysis that make what this guy is telling you so far out there it’s comical. We’ll keep it sweet and simple.

First, raise $100K minimum to start in REI. Question for the investor, what does he want you to do with this $100K in funds? Invest it all in one deal? Now, how smart is that? With one property, if things go south, you have nothing else to fall back on.

But, I digress. Let’s say that you find 9 other partners and all of you contribute $10K, thus netting you the $100K that is “needed.” You find a property, fix it up and get it rented for the full $100K in funds. You get an awesome $1K a month rent. Taxes, insurance, operating expenses, etc. still cost $200/month. So you’re netting $800/month. Split 10 ways equals a whopping profit of $80/month each.

Same scenerio, same $10K from you, $90K from a lender borrowed at 8% for 30 years ($660/month). $660 + $200 = $860 or $140/month cashflow and you don’t have to split it 10/ways.

Now figure that $100K, putting $10K down (or into) a property, you can buy 10 properties. Using the same numbers as above, now you have $1400/month cashflow, not $800. That’s over a 55% increase in positive cashflow simply by leveraging your property.

Also, while we’re own this issue of not borrowing money, but using cash, that cash has got to come from somewhere. If you don’t have it personally, then you have to raise it. Now, how you can do that is fairly limited. You can steal it (not recommended). You can borrow from a bank(he doesn’t recommend it). You can get cash partners, or you can borrow privately. Now, whether you get cash partners or even privately funded, you’re still borrowing the money. With a bank, you’ll get about an 8% or so interest rate. With a private lender, you’re looking at 10-15%. And with a partner (or partners), you’re looking at a 50-80% interest rate.

Second, if “analysis paralysis” is a bunch of BS, then let me ask you, why have you not done 50 deals yet? Please don’t be offended. I’m just trying to prove a point here. Analysis paralysis happens because a new investor will study a deal forward, backward and all around the sides before even considering making a move, making an offer, etc. In most cases, they’ll find something, anything, that they question, which freezes them in their tracks. Then they either drop the potential deal or wait until another gets it and says “darn, I was close on that one.” That’s analysis paralysis, and in it’s simplest definition, it means FEAR. Fear is real. It’s not BS.

If you want to say that it’s BS, fine, but know this. If that’s the route you take, then forget about REI because you’ll never get a deal done. Why? Because, currently, you’re suffering from analysis paralysis, and if you don’t believe that it’s real, then you’ll never accept the fact that you have to overcome it. You are going to always be in the “almost.” You almost have your business plan ready. You almost have enough money. You almost have the right partners. You almost have the right deal.

Here’s a story that your cash friend will love.

My first deal, I put the last $1K down I had in my savings on a prop. At the time, I didn’t know where I was going to get the rest of the $44K to buy it, but what I did know was my market and that $45K was a good buy. I borrowed $3K to cover the rest of the down and closing costs, and I financed 95% LTV. A week after closing, I leased the property and did a cashout refinance, putting $11K back into my savings account after paying off the $3K, plus an extra $300 a month in positive cash flow.
Quick recap on that one. I made $10K just for buying it. I make $300/month off of it. Currently, the mortgage balance is about $50K on a property worth aprox $80K, so if I sold today, I’d make an extra $30K gross profit. And I financed it 120%.

So, am I going to lose my $1K investment if things don’t “work out?” Nope. Frankly, at this point, the absolute worst that can happen is that I choose not to make the mortgage payment and my credit gets tanked.

Raj

6

I didn’t even bother to read the replies, but I am sure they are saying the same thing.

Your “investor” buddy has completely forgotten about one of the biggest reasons real estate is financially lucative in the first place…

LEVERAGE!

Where else can you buy a $100,000 asset for only $10,000?

I do have a line of credit out there to purchase deals in “all cash”, but I only do this if it’s a property that cannot be conventionally financed because it’s in bad shape, or I simply get a much bigger discount by offering all cash as opposed to financing. Even then, I always refinance and pull 80% back out after I am done rehabbing it (if I plan to hold as investment).

To me, it sounds as though this guy was on a power trip or something. Ive seen successful investors begin with no cash whatsoever and just a credit rating.

7

Vis,

What this guy was suffering from was fear. From my take, I’d guess that TMCG scared this guy to death because he was afraid of TMCG as possible competition.

What better way to lessen the playing field than by scaring someone to the point of inaction?

Raj

8

I am with Visual_Underworld. Real estate is not and has never been any better of in investment than starting a corner popcorn stand except for leverage. Were it not for leverage I would not be able to build a $150,000 (gross annual rents) annual business with $7000 of my own cash in it. You can’t even get close. If I buy every deal cash then I would have a business the grosses $150,000 but I would have $1 million of my own cash in it.

9

well i’m at work again, time to kill.

i posted this with the intent of generating responses and again, thank you all for good/valuable input.

i believe, that this man i spoke to told me to raise the money (minimum 100k) because his thinking is:
if you can’t do this, then you’re not ready to run a business.

he believes the leverage many rei’s get involved in is very risky because, in his opinion, many of them do things, such as stretch the truth, to achieve financing goals.

and if they themselves do not stretch the truth, such as many of you on here ( you do it straight up), then a broker or someone else is again, stretching the truth. who does this leave as being liable for:
not reporting a real estate transaction to a bank
not reporting hx of business
in a nutshell:
who is liable for not reporting the entire truth behind appraisals, financials etc.?
the broker? the lawyer? you, the investor?

again, this is what i believe the man was trying to tell me.

he gave me some pointers such as
assembling a team with
a lawyer or paralegal
a realtor
a licensed contractor

all with MONEY to invest in

a company with clear goals for investing that has identified a market that presents benefits that MATCH the goals of the company. these type members will only solidy profits and cut DOWN on expenses - how many of you have invested in re and found the contractor not showing up for a month or a lawyer who f’d something up or a realtor who’s sucking up your profits?

the point of the 100k is NOT to use it to buy ONE property, but rather - for me, as the Developer of this company, to learn basically, how to build a business and NOT jeopardize my hard-earned savings by investing by the seat of my pants.

And, his advise about “buying all cash” is to avoid poor debt ratio’s.

if i buy it for 50k cash - with no debt

rent it for 1500 a month with NO debt service

my ROI’s etc. may be lower, but the company will own it, rather than a bank/lender and my flexibility will be higher in terms of what i can do with the property in terms of selling it, leasing optioning it etc.

also, if i have the 100k and choose to utilize a lender - i have more money to absorb any shortfalls/mistakes that may/will pop up.

“real estate investing is like being on a road in manhattan - you need to hit all the green lights. Hitting a red light in REI with pennies in your pocket is like hitting a red light in Manhattan when you’re short on gas - you’re f%$ked!”

10

You are so right. I have been doing this all wrong all this time. I guess Donald Trump was wrong when he borrowed $34 billion dollars to build Trump Tower (which is now worth about $350 billion), he should have saved up $34 billion dollars and bought it all cash. He is such a bad business man. If I were you I would not invest in real estate. Thanks for showing me the error of my ways.

11

If you’re skeptical about a particular property you’ve considering investing in, hire a building inspector to go through it first.

From my experience, most things listed on the MLS through a realtor are “clean” from a title perspective. Any back taxes/liens will generally be paid by the seller at closing. Properties purchased off MLS, though, should have a title search done.

You are correct about that the ideal way to have property is to have 50% equity, but that means you’ll grow very, very slowly. It also makes your properties more of a target for lawsuits and the like. The less equity you have in them, the less apt a lawyer will be to go after them.

Generally speaking, it’s wise to “expand” your portfolio of Real Estate during the down cycle (which we’re entering)… when rising inventory creates a buyer’s market. When the cycle is about to peak out, you can choose which of your properties you can sell and buy down on your other properties. I personally call this “contraction”, some call it reverse pyramiding. A seller’s market is also generally a good time to refinance your existing loans down to a lower rate, if you choose not to sell them. You may feel as though you’re taking a step or two backwards going from, say, 100 units down to 30, but those 30 units will have much more equity in them and you’ll actually be able to grow faster in the future.

12

Blue’s tongue in cheek response aside, exactly HOW does this investor suggest that you “raise” this money?

Truthfully, as stated before, there are really only two legal ways to raise that amount of money. One is to have it already yourself. The other is to borrow it. Yes, you can create a LLC or partnership to raise the capital, but don’t believe for an instant that that is not borrowing funds. In many cases, that could be the worse way to borrow funds.

I also don’t understand how the ability to raise $100K or more in operating funds is a guideline to determining if you are ready to run a business or not. I know of several people that have an uncanny ability to “find” money. They could raise $500K or more in a month for business project, yet they couldn’t manage a hotdog stand properly.

What makes someone truly a good businessperson is that they know, and accept, their own limitations and are smart enough to find people to work for them that will offset that limitation.

he believes the leverage many rei’s get involved in is very risky because, in his opinion, many of them do things, such as stretch the truth, to achieve financing goals.
In some cases, he’s right. Many new REIer’s especially do this because they don’t have any money and they follow a guru’s teaching of overfinancing to generate cash. However, when guru’s speak of "overfinancing’ they are referring to the purchase price, not the value. In my example above, I pulled money out of the deal, but still stayed at less than 75% of FMV. So, the simple answer to this, is don’t do it.

And, his advise about “buying all cash” is to avoid poor debt ratio’s.

How exactly are you getting a poor debt ratio? If your goal is to rent, then obviously your goal also is to make a profit doing it. That means that you must buy a property low enough to finance the total cost of buying/repairing and that payment must be less than what you can rent it for. If that happens, then you have a very good debt to income ratio.

[b]if i buy it for 50k cash - with no debt

rent it for 1500 a month with NO debt service

my ROI’s etc. may be lower, but the company will own it, rather than a bank/lender and my flexibility will be higher in terms of what i can do with the property in terms of selling it, leasing optioning it etc.[/b]

If you can buy and fix something for $50K that will rent for $1500/month, I’ll hire you TODAY!!!

Truth is, if it can rent for $1500/month, then it’s ARV is gonna be at least $150K. Plus, I’d guess a minimum of $50K in rehab costs. Of course, that’s still $50K in equity. With $50K in equity, I can be pretty flexible in what I can do with the property, and doing it my way, I’d still have my $100K in my pocket.

also, if i have the 100k and choose to utilize a lender - i have more money to absorb any shortfalls/mistakes that may/will pop up.

That’s true, but again, where is the $100k coming from?

“real estate investing is like being on a road in manhattan - you need to hit all the green lights. Hitting a red light in REI with pennies in your pocket is like hitting a red light in Manhattan when you’re short on gas - you’re f%$ked!”

Except that if you bought with all cash and you hit that red light, guess what? You’ve only got pennies left. If you financed it, and you put your seed money in the bank (along with whatever else you were able to pull out of the property), you can sit at that red light for a loooong time before it becomes a problem.

Raj

13

I purchased several properties without 100k and without cash.

I’m somewhat embarassed to say that I was 70-80k in debt. NON REAL ESTATE debt. Two years later I have NO debt other than real esate…thanks to real estate investing.

If I raised 100k it would be for 10k earnest money on 10 properties. Then I would sell 10k notes and use it all over again.

One person’s RE advice should not be gospel. There are different styles, goals and objectives for each investor. You find a style that compliments you and give it a try.

Investing with cash is great if you have cash. If you don’t there are plenty of successful ways to acquire real estate.

14

okay lots of knowledge to soak in here.

thank you all for the helpful input.

and Bluemoon06 - trump is the man - i wear his cologne, it smells fantastic.
;D

15

Always invest with cash – other people’s.

Da Wiz

16

Actually, I found a 7 unit complex in another state that had an asking price of 50,000 that rented supposedly cash flowed for 1500, it included property management that was already entacted (owner of hair salon was property manager - pay was free rent), and the property also offered another commerical unit - currently a laundrymat - owner owns it and has property manager care for it.

but

it’s in a dead area of country, and i mean dead - what do you think raj?

i expanded on seller’s positive cash flow advertisement and came up with under $300 - which he told me was inaccurate.