Are you struggling with the money to buy your first commercial property? If so, you’re not alone! This topic is number one on the minds of new commercial real estate investors. If you’re a beginner, this training is likely the most important video you’re going to watch until you become an owner. Here are the six ways to fund your first commercial property:
Method 1: Bank Financing
The most traditional way to fund your first commercial property deal is through bank financing. This straightforward method is for those who already have the money for a down payment. It involves approaching a bank to secure a loan for the purchase, after which the bank finances your deal. Let’s examine a real-life scenario of our student who, with our help, secured a commercial real estate loan for a 24-unit apartment complex.
24 Unit Multifamily
Ken, an engineer without prior real estate investment experience, purchased a 24-unit apartment building for $1.2 million.
- He obtained loan terms of 80% loan-to-value, which means he made a 20% down payment.
- The interest rate is 6.75% with a 25-year amortization and a 7/7 ARM, indicating the loan is fixed for the first seven years and then adjusts every seven years thereafter.
- This loan is a recourse loan, meaning Ken personally guarantees it. Now that Ken has gained experience, when he refinances and secures a new loan exceeding one million dollars, it will likely be a non-recourse loan, which is preferable. A non-recourse loan means there is no personal guarantee, so if the property fails, they cannot pursue you personally.
How did Ken secure a sizable commercial multifamily loan with no experience? As our student, Ken leveraged a loan broker from our preferred vendor network. By utilizing one of our brokers and drawing on our twenty-five years of experience, he managed to obtain an exception for this commercial loan.
Method 2: Creative Financing
Creative financing is the second method for funding your first commercial deal. If you don’t have the initial capital or have bad credit, creative financing can be a game-changer. We teach our students creative financing techniques that bypass banks, such as seller financing and the Master Lease Agreement. And in today’s market, mastery of these strategies is essential for success. To illustrate these creative strategies, here are two inspiring examples of student deals funded using this approach.
90 Unit Multifamily
Jacob, acquired a 90-unit apartment complex with zero down payment. Through our direct-to-seller marketing, he located the property and secured partners to finance the deal. The full story of this remarkable deal is detailed in my interview with him here: Waiter Buys 90-Unit Apartment Deal No Money Down. We structured the deal, so Jacob became a 33% owner without investing any of his own cash. Since then, the property’s value has doubled, and Jacob earns $6,000 monthly. At only 27, Jacob is managing the property and has is part owner of a multimillion dollar commercial investment.
Value-Add Storage Facility
Dean used a master lease agreement, one of my preferred creative methods. Once more, through our direct-to-seller marketing, Dean discovered a 119,000 square foot storage facility. He bought it for $2.2 million, putting down just 10%. Three years on, an institutional buyer made an offer too good to pass up. So, Dean is now selling the property for $4.4 million. In a mere three years, Dean’s use of this funding method will net him over $2 million!
More details on Dean’s transaction can be found here: No Bank Loan Real World Commercial Deal.
Method 3: Syndication
Syndication involves pooling money from private investors to finance the purchase of a commercial property. If you don’t have the full amount for a down payment or want to leverage existing capital to do multiple deals, syndication can be an effective funding method. However, syndication is not credit dependent, it is deal dependent. This means the deal must satisfy specific criteria to be considered suitable for private investment. We dedicate a significant amount of time to assessing deals with our students in order to determine if they are good enough to include an investor. Adding an investor to your team changes many aspects of the deal, including responsibility, returns, deal structure, and exit strategy. It’s essential to understand these changes, and this is yet another reason why having an experienced mentor is so important.
Real World Syndication Deal
Take, for instance, Takashi and Rae, a husband and wife team, who used syndication to build their portfolio while retaining majority ownership. Their investors are passive, meaning their contribution to each deal is purely financial. The private investors supply the capital, while Takashi and Rae bring an off-market property, along with the expertise to carry out the deal and manage the property. By effectively using their funds and know-how, they’ve grown their multifamily portfolio through syndication and have become full-time commercial real estate investors.
Method 4: HELOC (Home Equity Line of Credit)
A Home Equity Line of Credit (HELOC) can be a useful tool for leveraging the equity in your home to acquire commercial property. We offer a training titled Unleashing Your HELOC Power that explains how a HELOC works and how to determine the amount of equity you can borrow against for a down payment. However, exercise caution when using this method to fund your initial commercial property investment. You should not tap into your home equity without the guidance of a mentor who can assist you through the process and help evaluate deals. It’s crucial to execute this method wisely with the right deals or you can risk losing your home.
$6 MM Multifamily Portfolio
With expert advice, a HELOC can be a smart way to utilize your home’s equity to generate returns. For instance, one our students Dave, built a $6 Million Multifamily Portfolio part time, starting from scratch while he drove a truck full time. Over five years, he acquired seven multifamily properties. To finance two of these, Dave utilized a personal HELOC. He invested in a multifamily property, increased its income and value, refinanced, and repaid the HELOC. Dave then repeated the process with another property, applying similar value-add strategies, refinancing, and paying off the HELOC. Over five years, we guided Dave with a disciplined and focused strategy to build this $6 million portfolio, which now generates an annual income of $600,000. It requires patience. Commercial real estate is a marathon, not a sprint, but it can be highly rewarding if you maintain a disciplined approach.
Method 5: Retirement Account
The fifth strategy involves tapping into your retirement funds. However, the challenge with this strategy lies in navigating the associated taxes and penalties. Is taking the hit and paying the high taxes and penalties the only option? Not at all! Our proteges, Eric and Maria are CPAs. They had retirement funds that they wanted to use to buy multifamily real estate, but they were fearful of using them because of the taxes and penalties. We helped them take that step, so that they could tap into their savings, and not only use them, but also benefit from them today.
3 Off-Market Multifamily Deals
First we used the three pillars of commercial real estate investing to find a good deal:
- Purchase Below Market Value: Through direct marketing to sellers, Eric and Maria secured an off-market deal below market price.
- Rent Upside Potential: Identifying properties with below-market rents is crucial. By increasing rents, Eric and Maria can drive up the property’s value, which allows them to either sell or doing a cash out refinance to buy another property.
- Location, Location, Location: The property is in a good neighborhood, which is an important factor in being able to raise rents and increase property value.
To offset taxes and penalties, we had Eric and Maria perform a cost segregation study. They used the cost segregation method to accelerate the depreciation of their buildings, so that they were able to gain a significant loss on the property, which would offset the federal taxes. Essentially, it ensures that you have enough tax loss to cover an early withdrawal from your IRA. In their case, Eric and Maria realized a $65,000 tax saving from accelerated depreciation, which more than covered the withdrawal from their IRA. They are now pursuing their fourth deal with us, financed entirely through their retirement funds.
Method 6: 1031 Exchange
The 1031 Exchange is a powerful tool for investors to fund commercial property, serving as one of the most effective wealth-building strategies. This provision of the IRS tax code allows you to sell your current property and reinvest the profits into a larger property without paying capital gains taxes. So, if you have a single-family rental with equity, it’s possible to sell it and upgrade to multifamily, self-storage, mobile home park, or even a warehouse. This approach has been instrumental in the growth of my own portfolio over the years. Beginning with the sale of some single-family homes, I transitioned to multifamily properties, improved them, increased rents, sold them and progressively moved to larger investments.
My own example shows that strategic use of a 1031 Exchange can lead to significant growth in your real estate portfolio over time. Although my recent training offers an in-depth guide on transitioning From Single Family to Multifamily with a 1031 Exchange, here is a brief overview of the steps involved:
- Sell your single-family rental.
- Reinvest the profits into a a ‘like-kind’ larger property, which must also be real estate.
- Adhere to strict timelines: Identify a new property within 45 days post-sale, and close the deal within an additional 135 days, totaling 180 days to finalize the transactions. If you miss these deadlines, you will be required to pay capital gains taxes.
- You must use a 1031 Exchange intermediary to hold the funds as mandated by the IRS. When you find your deal, they’ll do the entire transaction.
Every Successful Commercial Real Estate Investor Has a Mentor
Whether you opt for traditional bank financing, creative financing techniques, or leverage innovative strategies like syndication and 1031 exchanges, the key lies in knowledge, strategy, and expert guidance. Every successful multifamily investor has a mentor: Commercial Property Advisors Protege Program
If you have any comments or questions, text PETER to 833-942-4516.
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