I've been asked many times what is best way to begin investing in commercial multi family real estate. To decide what is best for you you need to keep the following in mind: How much money do you have, your skill set, and of course your expected profits.
The task of a new real estate investor who wants to learn about multi family investing takes much time and involves developing new skills sets that can be prone to mistakes. This is probably why many people either fail to start, or fail to succeed. I have found that most people would rather be part of a multi family apartment house deal where they can learn about multi-family ownership, and secondly also put money into an investment that gives them a fantastic return. I suggest that the best way for a new investor to succeed with the least risk, and best return is to piggy back on the experinece of others investors who have already been successful
What is The First Step and How?
You should simply create a commercial multifamily investment fund and bring in experienced partners for a share of the profits! This is very simple to do.
Now, before you solicit the first membership, you need to sit down with an SEC attorney and ask them to create an investment fund that allows for the collection of investment dollars for the purpose of acquiring multi-family property. You do not even have to have had a property identified; just the purpose of the fund would have been established and documented.
Then you will open the fund to potential investors. Then anyone you speak to about the opportunity, you hand them an "accredited investor questionnaire" that they would have to sign. Once that is returned to you, then you give them an "Offering Memorandum" describing the fund and how it worked. There is one more important document to create and that is called a "Private Placement Memorandum" that will satisfy the SEC's requirements of complete disclosure. Here's the real catch, this is the one that would keep you out of jail.
All the funds you are going to collect should be held by an escrow agent. You should not take control of the funds personally and if an investor wanted their money back before you purchased a property, they would be entitled to because it was clearly stated in the Private Placement Memorandum that they could do that up to thirty days before the scheduled closing date of a property. So that's all the legal stuff! You want to make sure this is in place before you even start to talk to investors.
What about buying the property?
The type of property that you are going to go after is to be clearly stipulated in your Private Placement Memorandum.. This is where it gets fun! I believe that with the impending commercial foreclosure crisis, you should be looking for either a B+ to an A class multi-family property that can be purchased for pennies on the dollar. None of this no-money-down stuff. The number one criteria is that you are going to buy a great asset at a ridiculously low price from a bank who is desperate to get these non peforming loans off their books.
Why would you be able to do this?
Because since you are shopping with cash; no schemes, no seller-carrybacks, just cold hard cash will give you the upperhand in negotiating. Here is how it works. Let's say that 100 investors put up $ 35,000 apiece into the fund. When the fund closes, you can contact several lenders and say that you have $ 3,000,000 available to help their balance sheet and take some troubled assets off their books. The remaining $ 500,000 should be kept in reserve to run the property. I can assure you, there are many banks right now that have been told by the FDIC that they need to raise cash fast. These banks should be your first stop. Your objective should be to buy good property, property that you would want to live in yourself, fix the problems with it and then sell it and do it again. Every step of the way, the investors would be involved and would see how the process works and everyone gets paid accordinly to their proportional investment.
Duncan Wierman is an Ex software company CEO turned Real Estate Investor. Duncan founded The Wierman Group in 2003, and now manages real estate investment funds created for conservative investors who want returns and tax savings that exist in multifamily real estate in emerging markets. For more information about his company, please go to http://www.TheWiermanGroup.com
Filed Under: How To Start Investing
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