Got Funding? Get Creative!
Funding for multifamily properties can be one of the highest barriers to entry in the real estate business. I remember the very first time I walked into a lender’s office (summer of 07). You might think I would be nervous, but NO, not me! I waltzed right into the commercial lenders office at the bank that I had been keeping my (unimpressive) checking account at for the last few years, sat down, and began to explain my big plans for my future in real estate.
Note- Something I learned much later in life, is that if the person you are speaking to, is staring off into space or looking fixedly at the Ficus plant in the corner of their poorly decorated, mid-level managers office… they don’t give a damn what you are talking about.
The lender was actually polite enough to let me drag on about the 100-unit deal I had brought him to look at. When I was done with my Oscar-winning pitch, including full-color pictures of the property, he gently leaned forward in his seat and looked me in the eye, and said…
“Who do you think you are? What money do you think you have to put down on this multimillion-dollar deal? What experience do you have, that you think qualifies you, to buy/borrow on such a large deal? Thank you for your interest in our institution, but we are in no way interested in your loan application. Have a nice day.”
That was the end of that conversation. I walked out of that guy’s office feeling about six inches tall. True story.
I wish I could say that I shrugged it off and went right out into the real estate world and built a huge portfolio and became successful besides his admonition. Truth be told I went home super pissed off. Yes, I did eventually do all those things, but not before getting set back mentally and emotionally.
If you have been in the real estate business for a while, I bet you have a similar story of your own. It’s normal. What followed was the next 17 years in the multifamily business and the building of a large portfolio and management company. I survived the Great Recession by mastering the techniques of creative financing such as seller financing, master lease options, and raising private capital just to name a few. I have seen days like this before.
Now we are entering into a similar time in the lending/economic market (like just before 2008). Rates are high and prices are high too. That is a combination what will either result in prices coming down or downpayment going up. The third option is creative financing for multifamily. Using techniques like master lease options or seller financing.
- Master Lease Option
- A technique to control the operations and future sale of a property with the use of 2 contracts.
- The Master Lease- this contract is a rental agreement between you and the seller of a property giving you the right to rent the entire property with the right to sublease the units to the tenants.
- The Option Memorandum- this contract sets the price that you and the seller have agreed on and the time in which you have the exclusive right to buy the property at the agreed upon price.
- Use this when a seller has a mortgage on the property.
- Risk- you have the rights of a renter not an owner.
- Seller Financing
- This is as simple as it sounds. The seller will be financing (holding a mortgage on) the property they are selling you. Instead of receiving all cash at closing (usually funded by the bank loan + downpayment) the seller will receive a lien against the property. Just a bank loan the seller will have to foreclose on you if you don’t make the scheduled payments.
- The deed will transfer to you after a regular closing (title company/lawyer).
- The seller must have full equity to transfer the title.
- Loan terms (length, rate, downpayment) are all fully negotiable.
- Give on price, take on terms!
I used these techniques to build by first portfolio. Creative financing for multifamily will be one of the most talked about topics in the near future. Why? Because it works when traditional debt is not an option, but the seller still must sell.
If you want more info, check me out the Education (to be hyper-linked) section of our website where I have free courses teaching you how to:
- How to Get Creative Financing for Real Estate Deals
- Use Master Lease Options
- Get Seller Financing
- Get Brokers to Find You Creative Deals
- Negotiate Creatively
- Much More
About the Author
I am a multifamily owner/operator and Chief Operating Officer at Broadwell Property Group. Through my companies, I seek to purchase and manage a currently growing portfolio of commercial multifamily real estate.
In 2005 I quit my job as a corporate pilot and went into real estate full-time. I had closed only one deal. A duplex. It was cash flowing about $300 a month. I started my entire real estate carrier with this one duplex and a life savings of $10,000. Not much.
My first 402 units were completed with some form of creative financing such as seller financing and master lease options. Over the years I built a large portfolio of real estate consisting mostly of apartments. I built a management company that operated the portfolio. At the peak that company was comprised of 16 employees and managed over 1000 units.
Over the years I had many successes and many failures. Some small and some big. I have made a lot of money and I have lost a lot of money. I have seen all phases of the market. The up cycles and the down. The good times and the bad. I have survived them all. Knowledge and skills are only passed on by those who survive.
The information I offer you on this site is my own. It has been tried and tested over a long career in the real estate business. Everything here has functionality that you can use, not untested theories. I have been successful with everything I teach. You can be too.