Hey everyone! I’m really looking for some help in better understanding CRE.
So I’m a little confused on the financing of commercial and how to begin working with commercial brokers.
I know that with residential you basically have to be pre-approved to work with an agent because the financing is based strictly on you and your own income. I know however that with commercial, the mortgage is based much more on your property and the performance of it. Because of this in my thinking it would be completely impossible to go to a bank and get pre-approved for a commercial mortgage because there in no property yet to get the mortgage on.
Do commercial brokers require you to have proof of funds or anything before they let you work with them? Wouldn’t it be impossible to get a commercial mortgage without first having a property under contract?
If I just called a broker up and said that I was interested in their property that is listed, would they first ask me about my finances and how I would purchase it if I was interested?
Also, I have heard from some people that for CRE mortgages the bank looks at your net worth and your cash reserves along with your money that you have for a downpayment. Well if somebody say borrowed 70% from the bank and then borrowed 25% from a private lender and then put up the 5% themselves, would the bank allow this even if your DCR was still say 1.5? I have heard that this has been done before so how do people get around putting up the whole downpayment themselves and get around the net worth and cash reserves requirements?
Commercial brokers don’t require proof of funds, but the lender will. You just put your offer down and explain why need to tie it up for a long time for all the inspections the lender is going to require. Commercial mortgages often take several months to finance because of due diligence, unlike a residential mortgage.
How do people get around putting up the whole downpayment? By financing another building they own. Ex. you own apartment building A with $200K of equity from an appraisal. You finance that equity privately to cover the downpayment on apartment building B.
I don’t think that that was the answer you were hoping to get, but if you don’t already own property, you are going to have a really hard time buying a commercial property like an apartment building with little or no money down. There are some theoretical creative financing strategies out there creeping around from late night infomercials, but most lenders and commercial vendors are not that dumb to entertain such a proposal.
So with commercial basically what it comes down to is your reputation and earnest money on the line when you put a property under contract. You can put a property under contract without necessarily having the funds lined up but you better get them lined up as quickly as possible. Is that about right?
Secondly, I realize there are some late night “no money down” techniques that some gurus try teaching. I understand it is very unlikely to buy a property with zero down unless it is a lease option or something but what I was mostly referring to was using private investors money to fund down payments. This is where the “none of your own money down” type deals come into play.
I know this actually takes place because I have contacted a couple of people who have done deals like this to verify that they weren’t just some made up stories to sell a boot-camp. For example, say somebody needs a 25% down payment to purchase a commercial property. They borrow some of that money from a private lender and take that person on as either an equity partner or debt partner.
I realize that banks are more strict now than what they used to be but doesn’t this still exist? If the numbers are good enough why wouldn’t this be allowed? I know people do it so there has got to be a way.
Yes, in theory, it sounds like an easy mathematical equation. Logically, could it work? Yes. You could even get a wealthy relative to lend you the downpayment and do it and some people some do.
But, the reality of what you’re saying is this. You’re asking, hey can Joe Blow off the street do a $5K cash advance on his credit card and buy a distressed million dollar apartment building by approaching private lenders for downpayments? In theory, yes. But, in reality it’s highly unlikely because you’re asking strangers, not wealthy relatives, to put their money at risk with people they don’t know.
Most investors who are good with money also understand risk management and practice it. Fronting downpayments are huge risks for investors these days, especially after what we saw from 2008. Why take that risk when private lenders are getting approached for first mortgages and can seize the equity in the building for the difference if anything goes wrong? It’s all about risk management.
Yes, you can try selling yourself. Maybe you’ll even be lucky like some of the rare people on Shark’s Tank with unproven ventures who borrowed money from venture capitalists. But, more likely than not, you’ll run into Kevin’s who’ll tear you apart for having little or no skin in the game or proven track records and wasting their time. Most private lenders got burned from the 2008 crisis and they are avoiding risky ventures such as low downpayment deals–it’s better to have $100K in the bank earning 2% than funding downpayments at 14-20% and risk losing it all. The reality of real estate investors loosing their investors’ shirts is everywhere. Robert Kiyosaki filed for bankruptcy. Trump has gone through three bankruptcies. Good for them. Not so good for all the people who lent them money. And these are supposed to be best of the real estate investors. So what does that say for everyone else?
It’s really hard not to notice all the people who’ve lost money in real estate and not have it linger in a private lender’s mind whether you’ll also loose their money. That’s why they want to see skin in the game like huge downpayments. Banker managers can also get fired for making bad loans, so they’re out to manage their risk too.
Yes, in theory, it sounds like an easy mathematical equation. Logically, could it work? Yes. You could even get a wealthy relative to lend you the downpayment and do it and some people some do.
But, the reality of what you’re saying is this. You’re asking, hey can Joe Blow off the street do a $5K cash advance on his credit card and buy a distressed million dollar apartment building by approaching private lenders for downpayments? In theory, yes. But, in reality it’s highly unlikely because you’re asking strangers, not wealthy relatives, to put their money at risk with people they don’t know.
Most investors who are good with money also understand risk management and practice it. Fronting downpayments are huge risks for investors these days, especially after what we saw from 2008. Why take that risk when private lenders are getting approached for first mortgages and can seize the equity in the building for the difference if anything goes wrong? It’s all about risk management.
Yes, you can try selling yourself. Maybe you’ll even be lucky like some of the rare people on Shark’s Tank with unproven ventures who borrowed money from venture capitalists. But, more likely than not, you’ll run into Kevin’s who’ll tear you apart for having little or no skin in the game or proven track records and wasting their time. Most private lenders got burned from the 2008 crisis and they are avoiding risky ventures such as low downpayment deals–it’s better to have $100K in the bank earning 2% than funding downpayments at 14-20% and risk losing it all. The reality of real estate investors loosing their investors’ shirts is everywhere. Robert Kiyosaki filed for bankruptcy. Trump has gone through three bankruptcies. Good for them. Not so good for all the people who lent them money. And these are supposed to be best of the real estate investors. So what does that say for everyone else?
It’s really hard not to notice all the people who’ve lost money in real estate and not have it linger in a private lender’s mind whether you’ll also loose their money. That’s why they want to see skin in the game like huge downpayments. Banker managers can also get fired for making bad loans, so they’re out to manage their risk too.
I agree and that does make a lot of sense.
I think a very important aspect here is to be able to grow personal relationships with people who might become private lenders. I agree that most people would not want to lend a complete stranger money to do a deal. Being able to build a relationship with people who have money I believe is crucial.
As far as the lack of experience issue, here is my thinking. Instead of borrowing a down payment from a private individual and taking them on as a debt partner, wouldn’t a better alternative be to have them fund a large chunk of the down payment and instead take them on as an equity partner? So lets say this other person funds 75% of the down payment and I fund 25% of it. I do all of the work from originally finding the deal, to closing, to managing it, to everything. We slit ownership up say 60-40 or somewhere around that. The benefit to the private investor is that they have a chunk of ownership of a cashflowing asset without having to do any work for it. The benefit to me would be obviously not having to put up all of the down payment but be able to have ownership of a larger property than what I could afford on my own.
In my thinking this would be a much easier way to really gain a lot of experience without having to try to deal with very highly leveraged transactions. I also feel like owning say 40% of a 1 mill property is a whole lot better than owning 100% of nothing or even 100% of a 100k property.
My thoughts are it’s still going to be a big challenge, even with equity arrangements. You should watch Dragon’s Den and Shark’s Tank and see the kind of proposals lenders are presented and you’ll learn some important lessons in dealing with lenders. There’s entrepreneurs there who believe in an idea and spent their life savings, mortgaged their house, and maxed out their credit cards for something they believe in and then they go to these venture capitalists and they tell these entrepreneurs to cut their losses and stop doing it because they know from experience it’s going to be a money pit.
Believing you can accomplish a goal is one thing. Being successful at accomplishing that goal is something else.
Sooo many things can go wrong. Major capital items such as a roof and boiler can go, costly work orders from inspectors can arrive in the mail, followed by lawsuits from tenants and refusals to pay rent, and a distressed building can quite easily become the money pit that sends an investor into bankruptcy.
Not only that, but most investors including myself have experienced contractors, tenants and others they do business with who are completely unreliable–saying they will do something and not following through. It can be something as simple as a tenant telling a landlord they want to paint a white apartment fuscia and then promising to paint it back to white when they give notice to move out and they don’t paint it back. The tenants also didn’t put up a security deposit either because they didn’t have it or the law in that area wouldn’t allow it. Where’s the incentive for the tenant to follow through if they don’t have skin in the game? Past experience is going to make your proposal really hard to achieve.
Let me put this another way. You see a really inspiring movie on someone who climbed Mount Everest. You can then go to a good friend of yours and say you can climb Mount Everest and you tell him you really believe you can do it. But, you’re not an experienced mount climber. You can even get really pumped up and tell him you will do it next month and you need to borrow $3K for the trip and will pay him back in a few months with interest. Next month, you fly down there. You make it 30 feet up the hill and then reality kicks in and you realize how hard a task it is to accomplish. You decide you can’t handle the cold weather and how hard it is to hold onto the mountain. You think it’s too much and decide to climb back down, pack up and fly back home.
This is why you are going to have a hard time presenting an equity deal to a complete stranger for their cash investment towards a downpayment if you don’t have experience. It makes sense in a theoretical seminar who you are paying to tell you what you want to hear; it doesn’t make sense in the real world.
Believing you can do something and having a track record (experience) doing it are two completely different things. In theory, an equity arrangement makes sense. In practice, most investors are going to know better than take the kind of risk where they can loose their money.
You know what one great determinant of whether someone who believes they can do something can actually do it? That investor having skin in the game. Demanding a 35% downpayment and lending only 1st mortgages is a very good system for lenders to know you’re going to follow through. If they are lending seconds, even with equity sharing, there’s still not enough skin in the game. You can encounter some obstacles and walk away with little to loose while your lenders are left on the hook to loose a lot of their own money. Why would they want to do that with someone they don’t know?
My thoughts are it's still going to be a big challenge, even with equity arrangements. You should watch Dragon's Den and Shark's Tank and see the kind of proposals lenders are presented and you'll learn some important lessons in dealing with lenders. There's entrepreneurs there who believe in an idea and spent their life savings, mortgaged their house, and maxed out their credit cards for something they believe in and then they go to these venture capitalists and they tell these entrepreneurs to cut their losses and stop doing it because they know from experience it's going to be a money pit.
Believing you can accomplish a goal is one thing. Being successful at accomplishing that goal is something else.
Sooo many things can go wrong. Major capital items such as a roof and boiler can go, costly work orders from inspectors can arrive in the mail, followed by lawsuits from tenants and refusals to pay rent, and a distressed building can quite easily become the money pit that sends an investor into bankruptcy.
Not only that, but most investors including myself have experienced contractors, tenants and others they do business with who are completely unreliable–saying they will do something and not following through. It can be something as simple as a tenant telling a landlord they want to paint a white apartment fuscia and then promising to paint it back to white when they give notice to move out and they don’t paint it back. The tenants also didn’t put up a security deposit either because they didn’t have it or the law in that area wouldn’t allow it. Where’s the incentive for the tenant to follow through if they don’t have skin in the game? Past experience is going to make your proposal really hard to achieve.
Let me put this another way. You see a really inspiring movie on someone who climbed Mount Everest. You can then go to a good friend of yours and say you can climb Mount Everest and you tell him you really believe you can do it. But, you’re not an experienced mount climber. You can even get really pumped up and tell him you will do it next month and you need to borrow $3K for the trip and will pay him back in a few months with interest. Next month, you fly down there. You make it 30 feet up the hill and then reality kicks in and you realize how hard a task it is to accomplish. You decide you can’t handle the cold weather and how hard it is to hold onto the mountain. You think it’s too much and decide to climb back down, pack up and fly back home.
This is why you are going to have a hard time presenting an equity deal to a complete stranger for their cash investment towards a downpayment if you don’t have experience. It makes sense in a theoretical seminar who you are paying to tell you what you want to hear; it doesn’t make sense in the real world.
Believing you can do something and having a track record (experience) doing it are two completely different things. In theory, an equity arrangement makes sense. In practice, most investors are going to know better than take the kind of risk where they can loose their money.
You know what one great determinant of whether someone who believes they can do something can actually do it? That investor having skin in the game. Demanding a 35% downpayment and lending only 1st mortgages is a very good system for lenders to know you’re going to follow through. If they are lending seconds, even with equity sharing, there’s still not enough skin in the game. You can encounter some obstacles and walk away with little to loose while your lenders are left on the hook to loose a lot of their own money. Why would they want to do that with someone they don’t know?
I watch shark tank all the time and have given two presentations just like that to executives in companies. I know how it is done and completely understand what it’s like.
I appreciate your input but without actually knowing me it’s impossible to say whether I can do something or I can’t. It also seems like you think I don’t have any RE experience but I do.
Your point about strangers is good but I also know it’s not impossible. A lot of it comes down to having pre-existing relationships with people who might be able to help you.
I know without a shadow of a doubt that I will be successful and reach my goals. Obstacles don’t scare me but rather excite me to prove more people wrong.
Well good luck with that. That second last sentence makes me think of the Daymond John saying, Pioneers get slaughtered, but settlers prosper. Work with what’s obvious. Don’t try to do things to prove people wrong; just do what makes money.
Well good luck with that. That second last sentence makes me think of the Daymond John saying, Pioneers get slaughtered, but settlers prosper. Work with what's obvious. Don't try to do things to prove people wrong; just do what makes money.
Sorry if I came across too harsh in my last post. I didn’t mean it to be. It’s just that I know other people have done what I want to do and I have the mindset, “If they can do so can I.” It’s not about reinventing the wheel but rather just continuing to learn and reach for my goals.