Over the years I’ve had several conversations with would-be investors where they tell me that once they find the right property to purchase they will come back to me for the financing.
Months, if not years, go by and once again the same would-be investor says to me (this time not so eagerly) that as soon as he finds the right property he plans to use my services to get the loan he needs. You know where I’m going with this story. I believe there are lots of would-be investors out there who can’t pull the trigger. Why?
Fear. Fear of failure, fear of the unknown, fear of looking foolish in the eyes of their friends and family. I can understand their fear. For most of us, investing in real estate is a big leap into the unknown. But it need not be that way. Every new investor could take away much of the uncertainty of real estate investing by answering five questions before they buy their first rental property.
The first question they need to answer is:
Question #1 – Do I want to be an active or passive real estate investor?
Let’s begin by defining an active investor in contrast to a passive investor. An active investor is the person who makes all of the decisions, such as what property to buy, how much to offer, how to manage the property and which lender to use for financing their property. A passive investor allows someone else to make all those decisions and many, many more.
So let’s say you want to be an active investor. You still have a choice to make.
Question #2a – Do I want to invest by myself or do I want to be the decision maker for a group of CRE investors?
The advantage of being a solo investor is that you don’t have anyone else to satisfy about your commercial real estate investment strategy. But the disadvantage of going it alone is that often times you don’t have the financial resources to buy anything more than a small rental property, e.g., a duplex. If on the other hand, you are the managing member of an LLC with, let’s say four other investors, you now have significantly more money for a down payment and with more equity the group can buy a larger property. But the downside is you now have investors you will need to keep happy.
But let’s say for the moment that you would rather be a passive investor. You still have a choice to make.
Question #2b – Who do I invest with? A traditional sponsor? Or do I find a sponsor through a crowdfunding portal?
There is no doubt in my mind that every major real estate market in the country has several reputable commercial real estate sponsors that are looking for people like you to be passive investors in their next real estate venture. You need them for their real estate expertise and they need you because they are tapped out of funds to buy the next rental property. It’s truly a symbiotic relationship. For further information on how to vet a sponsor read, Don’t be a lemming: Vet your CRE Investment Sponsor.
In recent years crowdfunding sources on the internet have come into being to fill the role of the savvy CRE sponsor. Before you seriously consider crowdfunding I suggest you read my blog post, Crowdfunding – The Basic Facts and the Potential Opportunity.
If you’ve decided you want to be a passive investor, then once you’ve decided between investing with a traditional sponsor or a crowdfunding source, you can kick back and relax. Your major decisions are made.
If on the other hand you’ve decided to be an active investor you’ve got three more basic decisions to make. They are:
Question #3 – Who do I want on my real estate advisory team?
You should add people to your advisory team where you lack expertise. Each of these advisors should bring their unique backgrounds and experience to the team enhancing your chances that all the potential issues will be identified upfront during the due diligence process instead of being unpleasantly surprised after the transaction closes. At the very minimum you should consider having on your advisory team a:
- Real estate broker
- Mortgage broker/loan officer
- Real estate attorney
- General Contractor/Building inspector
- Property management company
Question #4 – How will I finance the property?
You have three choices: 1) you can go back to an existing lender relationship; 2) you can shop the mortgage market on your own; or 3) you can employ the services of a commercial mortgage broker. You should know my bias by now. I believe your best changes of getting the best possible loan for your property is going through a mortgage broker. If you want to know my reasoning, I suggest you listen to Parts 7 & 8 of my video series Secrets of a Commercial Mortgage Broker: How to Get the Possible Loan for Your Property.
Question #5 – How will I manage the property?
Again, you have three choices: 1) you can self-manage; 2) you can hire an on-site manager who reports directly to you; or 3) you can hire a property management company to manage your property. Each option has its advantages and disadvantages and which you choose is based on those criteria that are most important to you.
The Five Decisions
Now think back to the would-be real estate investor I mentioned in the opening paragraphs. How much easier would it be for him to buy a property if he already knew the answers to these five questions?
These are my thoughts. I welcome yours. What do you think prevents would-be investors from buying their first rental property?
Need financing? Email me today at [email protected] to schedule a time to discuss your financing need.