You're about to get a detailed inside look at a no money down 18 unit apartment building acquisition by Commercial Property Advisors Proteges Takashi and Rae. Discover how they used their knowledge and experience in commercial real estate to attract a passive investor and raise all the money needed to purchase this property, eliminating the need for them to put any of their own money into the deal. Plus, you'll learn 5 steps you can use to get private money investors for your commercial deals too!
3 Keys to Attracting Passive Investors
#1: A Good Deal
I have a recent video called What a Great Commercial Deal Looks Like. Be inspired and educated by this powerful video as you discover what a great commercial deal looks like from the example of a beginner investor who just closed on his first great deal.
You need to have expert knowledge of commercial real estate investing. In this case study, our student investors Takashi and Rae needed knowledge of apartment investing. There are 3 aspects of knowledge that are critical:
- Credibility: For someone to invest money in your deal you need credibility. In commercial real estate, credibility is the quality of being trusted and believed in.
- Trust: You need a relationship of trust with investors. Trust is a firm belief in the reliability of that person.
- Experience: You must be able to prove to the investor that you have already negotiated successful commercial real estate deals. You need a track record of success.
#3: An Incentivizing ROI
Incentivizing is making the deals enticing for investors. The idea is to structure deals with a high ROI, (returned on investment) to incentivize investors. The highest CD rate you can get at a bank today is 0.55%, under 1%. That’s not very enticing for people. A well-structured commercial deal offers higher return on investment for those with money to invest.
Meet Takashi and Rae
Takashi came from Japan when he was 19 for college and ended up staying in the States. One night when he was watching late night TV there was a program about real estate. It piqued his interest, and he decided to buy one small single-family home for a friend who couldn’t get a mortgage. He purchased the house and his friend paid him back while living there. After making money on that deal, he decided that real estate was a unique and profitable way to make money, so he began studying how to begin investing. After learning and investing he has concluded that commercial real estate, if managed well is the best asset to invest in.
Rae used to work for the real estate company in New York and purchased residential investment property. After she married Takashi, they set a goal together to achieve financial freedom. She spent her days focused on real estate investment and after six and a half years of hard work, they achieved financial freedom and became full time investors. They joined the Protege Program because they wanted to go to the next level as investors and learn and grow with the help of great coaches.
Takashi and Rae's $0 Down Apartment Investment Deal
Takashi and Rae’s 18-unit apartment building is an off-market deal. All the units are two bedroom and one bath and average 850 square feet. This is the average size of apartment units in this C+ class area. The property was purchased for $948,000 with an $11,000 credit for repairs after negotiations, so the final purchase price was $937,000.
This deal was so attractive because of the tremendous upside potential and high cash on cash return. With minor repairs and renovations, such as a replacing some appliances, they can increase the rents $100 plus per unit. If they were to completely renovate, they could increase the rents by $200 and the new property value would be $1.5 million. They can also implement the RUBS system so that the tenants pay the utility bills.
Takashi believes you must find the upside potential in every potential property. He views investing in real estate like buying a company. If the company is performing poorly because of mismanagement, once you fix the problem, the company will start making a profit little by little.
Structuring the Deal
Takashi and Rae’s investor is passive, meaning their contribution to the deal is purely financial. They provided the down payment for a traditional bank loan, as well as closing costs, inspection, and appraisals. Takashi and Rae provided the off-market property and all the knowledge and experience to negotiate and execute this commercial deal. They negotiated 60% ownership share to their passive partner and 40% for themselves. Takashi and Rae are also the LLC's managers. The property is owned as an LLC. They are the managers; the investor is passive. This is extremely important. You do not want a passive investor with no experience telling you what repairs to do, who to use to do them, when to raise the rents, or how to talk to your property manager. That would be a disaster! Overseeing day-to-day operations is critical.
They plan on increasing the property value and doing a cash out refinance in four years, at which point they will pay back all the money their partner initially invested. After that, their partner will receive 60% of the cash flow and sales proceed.
Takashi and Rae were able to structure and negotiate a deal with a passive investor because of skills they learned through our Protégé Program. But they didn’t just gain knowledge, they applied that knowledge in the real world. Many people learn but never do anything with that knowledge and their lives never change. As Takashi puts it, “If you learn and apply, then results come to you.”
Five Steps to Get Passive Investors
Step #1: Connect with Everyday People
Takashi and Rae have been networking with people and sharing how they achieved financial freedom. They have found that many people want to invest in real estate, but don't know how to do it. This was the case with their current investor, who they met at their daughters school and piano lessons. Some of you think you need to find rich people to raise capital. Nothing could be further from the truth. You need to connect with everyday people.
Step #2: Ask Questions
Find out what they're looking for. Takashi took the time to sit down and talk with his partner, they talked about his job and what he does. They also talked about what Takashi does as a full time commercial real estate investor. As a result of talking about real estate, his partner told Takashi he was very interested in investing.
Step #3: Discover their Problem
Takashi and Rae's partner wanted to invest his money in commercial real estate, but he lacked the time. His days are busy with a full-time job and family. There were other obstacles in his way as well. He didn’t have the skills and knowledge to analyze financial data, evaluate upside potential, negotiate with the seller, manage property, and create appreciation.
Step #4: Provide the Solution
Takashi and Rae's ability to find off-market deals, create great ROI, get the financing, do due diligence, do the inspections, go at a bank, close the deal, and make money as they have been all these years, were the solution to their investor's dilemma. Takashi was able to explain to him how he could invest as a passive partner, and how investing together would remove all the obstacles that prevented him from investing in commercial real estate.
They visited several properties together and after visiting the 18-unit property and analyzing the numbers, they decided to pursue the deal. Takashi and Rae didn't put any money into it, but they gave him their experience, knowledge, and time, which are of great value to their investor.
Step #5: Help Others First to be Successful, then Success Follows You
Help others in as many ways as you can. Rae says the most important thing is to connect with people, find out what they are looking for and find their problems and provide solutions. She believes you must help others first to be successful. There are many obstacles for real estate investors in today's hot housing market. It’s very difficult to find good off market deals and they can help other investors find those deals. They now have several partners and want to continue to grow and share their knowledge.
Takashi and Rae’s Commercial Real Estate Goals
- Their goal is to own 1000 cash flowing units working together with partners. Partnership is not always easy, but they like to work with people and as they learn from each other they can maximize their potential.
- To help as many people as possible to achieve their goal. And if they succeed, Takashi and Rae succeed.
Takashi and Rae’s Qualities that Attract Investors:
- Credible and trustworthy
- Investor First Mindset: when you're raising capital investors must come first
- They make a powerful team and balance each other
- They learned skills through our Protégé Program and then applied that knowledge