Multifamily property investing requires raising money because it typically involves acquiring apartments that cost more than a single-family homes you buy for real estate investment. Veteran multifamily investor Vinney Chopra has some ideas for you to think about to raise money for multifamily investing.
I love multifamily property investing and I love to help others who would like to learn how to invest in this area that I have been enjoying success in for more than 20 years.
Multifamily property investing provides nice, steady cash flow and checks every quarter to investors in many cases.
Many of my students ask how to get started in multifamily property investing and how do I raise money for it?
In raising money, it is important to have an understanding of the SEC (Securities Exchange Commission) rules and regulations. Second, it is important to build a strong team with at least one high net worth partner. Then, add a supporting team including a real estate attorney, a syndication attorney, real estate brokers in the emerging markets you are planning to invest in and a loan broker.
I have the attitude that we are serving many through multifamily syndication process – the valued investors, residents and staff.
I love to speak to larger groups of investors and help them explore commercial investing from the funds in self-directed IRAs, 401(k) and other tax deferred alternatives.
I believe it’s a great art in understanding the psychology in having the investors invest with you. You need experience and a good track record to share with them.
Four types of multifamily property investing financing
A recent article in Fits Small Business sets out four common multifamily financing options available to real estate investors who are looking to purchase or renovate a property with between 2 – 20+ units. Each of these loans have their own unique terms, rates, and qualifications.
The four multifamily financing option are:
- Conventional Mortgage – Terms between 15 – 30 years. Loans are capped at 80% LTV and typically have interest rates between 4% – 6%.
- Government-Backed Loan – Terms between 5 – 35 years. LTV capped at 87%. Interest rates between 3% – 6%.
- Portfolio Loan – Terms between 3 – 30 years. LTV of up to 97%. Interest rates from 3.70% – 5.70%.
- Short-Term Multifamily Financing – Terms between 1 – 3 years. Interest rates of 4% – 12%. Monthly payments are typically interest-only.
Changes happening in capital raising activities
“Banks are really pulling back,” David Hanchrow, CIO of Bristol Development Group, said in a panel discussion according to Multifamily Executive. “The biggest challenge for us is the amount of equity we’re having to raise for each deal,” as banks that issued 75% loans a few years ago are now offering loans at 60% or 65%.
Kirk Motsenbocker, CFO of JPI/TDI, said that “smaller regional banks are seeing an opportunity, with the big banks pulling back, to grab some market share.”
So smaller regional banks or boutique banks are one potential source of financing. This is the avenue I have taken quite a few times. The local banks close to the apartment community, know the location, the neighborhood and the potential that a savvy buyer can do to add value. This happened to me four times in recent months.
One such instance happened when I purchased a not-so-good looking asset of 160 units in small city of Lake Jackson, TX. Ultimately we won a top award from the city after we changed it for the better for our valued residents by adding many great amenities such as those below.
How multifamily syndication financing works
Vinney Chopra apartment complex amenities. Photos copyright Vinneychopra.com
You can raise money from others to begin your multifamily property investing.
But remember, there are specific more government regulations that dictate what you can, and cannot do, when raising money from others for your multifamily property investing. So do your due diligence and consult a good attorney so you stay out of trouble.
When you invest in multifamily properties and raise money from others to fund it, you enter a whole new world of government regulations that dictate what you can and cannot do while raising that money
Advertising for investors
“In the wake of the JOBS Act, when advertising for investors became legal under Regulation D, Rule 506(c), crowdfunding platforms like have sprung up to meet investor demand for access to the types of investments that institutions, pension funds and other larger entities have secretly enjoyed for years. No matter their size, in today’s market investors are looking for high cash returns, tax advantages and equity growth. Many also prefer the hard asset of real estate, as opposed to stocks, bonds, etc., and the ability to use leverage in their deals to enhance investor returns,” writes attorney Kim Lisa Taylor on her blog.
I have been very fortunate to work with Kim for the last 10 years. She is a top professional syndication attorney. My team and I have done 26 syndications so far and are moving into a $50 million fund in 2018. The market is getting tougher and it’s wise to have the money committed/raised as the opportunities arise that are conducive to syndication.
You see the cash-on-cash needs to be in the 12-12.5% range for the deal to be able to syndicate. We pay out to the Investors who are Class A of the LLC that owns the asset and we pay them 8-9.5% per year.
“Another plus that has arisen post-JOBS Act is that with platforms posting their deals online, investors and syndicators have a gauge to see what others are doing that they never had when all such offerings were “private” under the original Regulation D, Rule 506 [now 506(b)], which is still alive and well. As a refresher, Rule 506(b) doesn’t allow any form of advertising or solicitation, but you can include both Accredited and Sophisticated Investors, and there are a lot more Sophisticated Investors than there are Accredited, so there is still a need for private offerings under this rule for those willing to take the time to develop pre-existing relationships before making offers to investors,” she writes.
One very important fact about this 506 (C) fund is that only Accredited Investors can only participate and invest in it.
What is an 'Accredited Investor'
An accredited investor is a person or entity that can deal with securities not registered with financial authorities by satisfying one of the requirements regarding income, net worth, asset size, governance status or professional experience. The term is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include natural individuals, banks, insurance companies, brokers and trusts.
To be an accredited investor, a person must have a net worth of $1,000,000 or more excluding the equity in the primary residence or demonstrate an annual income of $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.
A sophisticated investor is a type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. For certain purposes, net worth and income restrictions must be met before a person can be classified a sophisticated investor.
Resources:
Multifamily Financing: The Ultimate Guide to Multifamily Loans
Apartment Finance Today: What’s Impacting Investments?
What are Investors Looking For?
What is an accredited investor?
What is 'Regulation D – Reg D’
What is the 'Securities And Exchange Commission – SEC'
Jumpstart Our Business Startups (JOBS) Act
About the author:
Vinney Chopra is the Founder and CEO of Moneil Investment Group and President of Ideal Investments Group. His latest accomplishments include acquiring 12 multifamily assets in the last 28 months, worth $132 million. His last two syndications were sold out in just a few hours, and one in 36 hours raising $4.7 million and another one $6 million in eight hours. Between the two syndication companies he founded, Vinney’s team is controlling over $200 million worth of assets. He is a mechanical engineer. After entering USA with $7, he graduated from The George Washington University with Master’s in Business Administration in Marketing, he shifted his focus to marketing and motivation. He was a professional fundraising consultant and motivational speaker for more than 35 years with a wonderful private company. Vinney and his wife started their real estate investments in 1983. He currently owns single-family homes and multifamily units in Texas, California, Atlanta, Arizona and India. Many times, people call him “Mr. Enthusiasm” or “Mr. Smiles.” He likes to bring great value to everyone he comes in touch with.
