So, you’ve decided that owning a multifamily asset is the best investment you can make. You know the tax advantages specific to real estate, and the benefits over flipping houses. You are ready to take the plunge but you don’t know where to begin. Enter, Step 1.
Build your team.
Real estate investing is very much a team sport. You alone will likely not meet all of the necessary requirements that relate to owning a multi-million dollar asset: cash required for down payment, net worth equal to the loan amount, 9 months of debt service liquidity, and/or experience. Network to meet a few like-minded individuals who you would feel comfortable partnering with to meet these requirements. Until you have a proven track record, the investors in your first syndication will likely be friends and family. This is a limited pool so adding the friends and family of two other partners will allow you to reach more capital.
Once this is done, you can start getting soft commitments from potential investors. Find out how much they would be willing to contribute and assume you get half of this amount. At this point, you should now have an idea of your price range.
You also need to cover your legal bases at this point. Find an attorney that specializes in Securities law and follow their recommendations. Depending on the details of your capital raise, you will need them to draft an Operating Agreement, Subscription Agreement, and possibly a Private Placement Memorandum (PPM).
Find the deal.
This can be done one of two ways. Find the deal first and then verify that the fundamentals of the market it is located in are good or identify two or three specific markets (cities/neighborhoods) and wait for a good deal to come to market.
Ok, but how do I actually FIND the deal?
You can start with LoopNet. Search the markets you’ve identified and look at all of the listings. Note the brokerage on each listing and visit their website. Do this until you have a good list of all the brokerages in town. You can also source brokers by searching for different keywords via Google.
As we all know, deals are getting harder and harder to come by. You’ve likely identified these specific markets because of the economics of the State that it is located in. If there are no deals listed in your target market, make your search broader. Search the State as a whole and when you find a deal that makes sense, do some market research on the area. You might just stumble into an emerging market.
Make an offer.
So, the hard part is done. You’ve found the deal and now it’s time to make an offer. Before you do, you need to look at the Offering Memorandum and take note of what should be submitted with your Letter of Intent (LOI). Make sure you ask the broker what their seller’s motivations are. Maybe it is achieving top dollar for their property or maybe they prefer a quick close with a short Due Diligence period. This information is key to writing a winning offer. You also need to know if hard money (non-refundable earnest money) is typical in that market. In a highly competitive market like DFW, hard money is the norm. If your offer doesn’t include it, fifteen other offers will, and you have no chance of winning the deal.
Your offer has been accepted and now the fun begins. Follow this link for a Due Diligence Checklist. Once you have requested all of these documents you will begin verifying all of the income, expenses, and leases to ensure everything is as it was marketed and there are no red flags. You will have an inspection completed and most likely a Phase 1 Environmental Site Assessment. During these 21-30 days of due diligence, you also need to secure a lender, the money, property management, and insurance policy. Getting a Letter of Intent from the lender and making sure you have the necessary capital contributions will be the most important.
Close the Deal.
Congrats, you’ve made it through your Due Diligence period. At this point, you need to form the Limited Liability Company (LLC) that will own the property. Make sure you give yourself enough time to complete this as it could take up to 30 days. Now you just need to satisfy all of your lender’s requirements, lock down your insurance carrier and property management company, and get ready to close.
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