Steps to Financing your First Deal
Steps to Financing your First Deal
Many real estate investors will tell you that the most difficult challenge is financing the first deal. I would agree that pooling your resources together can be a very tedious process. There are a lot of steps to consider before you have the right amount to make a purchase. Moreover, there are situations that make it hard for you to secure the proper financing for your first property acquisitions.
When we first started out, my partner and I only had a minimal starting amount to work with. The fact that both of us lacked real estate experience and being far away from the asset we were acquiring complicated things a bit. Adding to this limitation, we were in the middle of a housing crisis back then. Home prices plummeted and foreclosures were happening across the United States. Banks were reluctant to approve loans even for low-risk investors. For two guys who only had $500 to start with, the situation was definitely not working in our favor.
Yet, we were able to make a breakthrough! This is because we followed the right steps. Here’s what we did:
Step 1: Build your networks
If you are going to start out of nothing, then it’s best to build something right away. Since we didn’t know a lot about financing in the real estate sector, we decided to build strong relationships with local commercial brokers. They serve as your eyes and ears in the market because they are tasked with finding the best loans for the best possible terms. You only have to pay a 1% origination fee once the loan you are applying for is approved.
Step 2: Visit local banks
Reach out to local community banks. After we had found the best loans through our broker friends, we then visited these local banks instead of the bigger ones. The reason is simple: local banks are more likely to listen to your loan proposal that is if you show them the kind of properties you want to acquire. As a good rule of thumb, you need to provide lenders with a compelling business plan which should show how your investment setup will generate income. Your professional credibility kit is very important for finding the best loans or even getting seller financing. Seller financing got us our first large asset acquisition.
Step 3: Show a compelling business plan
When you’re presenting your business plan to a lender, you will also need to put your “skin in the game.” This means you will need to show the lender your sincerity by showing them how much you are willing to invest or spend. In our case, we didn’t necessarily put our “skin in the game.” Instead, we provided the lender with a highly detailed business plan. It convinced the lender to accept our offer, on the condition that we place a personal guarantee on the deal. We signed the terms and before we knew it, we were inches closer to getting our first loan!
Step 4: Get a loan sponsor
The loan amount has to be lower than the total net worth of the people signing on the loan documents. This is especially true when the investor/syndicator is putting together first few deals. While negotiating with the lender, you need to have a loan sponsor to support your investment, make loan payments just in case of an asset not producing enough income, and take a share of the income. A loan sponsor can be anyone, just as long as he or she has a good net worth.
Aside from these steps, you will also need one more important thing in mind in order to easily acquire your first loan: confidence!
Lenders are willing to give you a loan if they see your sincerity and eagerness to set up an investment that promises high returns. The property management company you choose also plays an important role in the loan qualification process. Don’t give up if you think it’s impossible for you to get your first loan. Try again until you finally secure the funds you need to start purchasing multifamily properties. Remember to talk with enthusiasm and optimism so that lenders will know you’re set on creating a highly sustainable business!