Often times, new investors ask me “How will I even buy a deal once I find one, I don't have the money?” And while that is a valid question, I believe that it is putting the cart before the horse. There are countless way to fund a deal (Seller financing, Private Debt, Private Equity, Conventional Loans, SBA 504, SBA 7A ) but the specifics about how to go about it are VERY deal specific. As such, its hard to make too much headway in this realm until there is an actual property in hand. That said, it can be valuable to make soft introductions to lenders (private or conventional) in advance. Just be careful not to take up too much of their time on “hypothetical deals”! Here's the extent of what that might look like:
“I don't want to take up to much of your time before I get the seller to ink our verbal agreement but we have worked out most of the deal breakers and I would be surprised if we don't have it in writing pretty soon. If I give you a quick rundown of what I am hoping to do, are you willing to give me some insight into whether or not any of the loan products you offer might fit?”
Aside from that, there's not much you can do relative to funding until you have an inked contract. One thing I often tell my students is that “If the deal is good enough, you'll find the money!” If there's enough profit to spread around, there are countless passive investors, private money equity and debt partners and conventional lenders who would love to share in your profits! As such, your job is to find a deal that is good enough to “afford” the financing you'll need to get it across the finish line.
I thought it might be helpful to give you a couple examples of how I've funded deals. The first property I ever bought required funds from 3 different sources. I extracted about $40K in equity that I had in my residential rental portfolio using a blanket mortgage on 3 of the properties (SIDE NOTE-blanket mortgages come with strings so be sure to go into any blanket situation with eyes wide open!). I also borrowed $60K privately at 10% SIMPLE interest, no payments until balloon between 12 and 24 months. The third piece of the puzzle was a $250K SBA 7a loan that I got through a local bank. We later sold this $350K purchase for $1.8 Million after several rounds of expansion. Perhaps I'll do a more thorough case study on that some time soon!
The second property I ever bought, Bloomfield Mini Storage, was supposed to be a no money down deal for me but we went a little over in our construction so I ended up putting in roughly $35K. I borrowed $80K from a private equity investor that I know from church and the remaining $305K came from a traditional bank. So if you do the math on this, I put down a little over 8% of the money and in exchange for that (and the work I put into it), I owned 81% of the property. My equity partner owned the other 19% and while that might seem out of whack, the bottom line is that my minority partner made just about 25% return on his investment per year for the two years that he was involved.
More recently I bought a property in Florida with just $5K out of my own pocket. I gave up 23.5% equity for an investment of $120K from two private equity partners and then raised another $375K in the form of private debt at a rate of 12%. So I put down 1% of the upfront money and own 76.5% of the property! Again, this was made possible because the deal could afford to pay for the funding. This property is now worth almost $1.5 Million just 17 months later. It always comes back to finding the deals!
While I think examples can be illuminating, I believe the real value in this post is what I am about to share. I want to summarize the approach I take to get deals funded. When I am analyzing deals, I do all the math as if I were going to buy the deal with all cash. Most folks who know they will need to raise money to get a deal done, include the "cost" of the money in the deal from day one. I don't. Instead, I essentially exclude the financing from my analysis so that I can get a good benchmark of the deal's potential performance INDEPENDENT OF FINANCING. Once I've done that, I "reverse engineer" the financing component. That is, I ask myself, "Given what I now know about the projected profits, how much can I afford to share with investors/banks?" In other words, "How much of the pie can I give up and still be excited about this deal?" Depending on what the deal can "afford", I will run a couple different deal structures though my spreadsheets. Generally speaking I like to look at a straight debt play, a straight equity play and a hybrid where I give up as little equity as possible and raise the remaining funds through debt. Every deal is different and some deals will work with any of the above structures In those situations I present my investors with the mentality of a "servant leader". Rather than pitching them terms, I ask what would work best for them...and I build the deal around their objectives and risk tolerances. Of course there are limits to how much catering I can do. Other deals will only work well with one of the structures mentioned above. In those cases, I simply take it to the investors who I know prefer that type of structure.
My hope is that this article will give you a bit of a foundation from as you start to look for and fund your first (or NEXT) self storage deal!
I further hope that you are finding some value in my storage musings and would love it if you'd post comments or questions below. Also if you're serious about creating wealth quickly using self storage, check out The Storage Rebellion UNIVERSITY!