Doing my first real estate deal
would like to get thoughts from people on how to put together my first real estate deal.
quick background: i have no direct real estate experience outside of general passion and reading, though I have plenty of financial analysis and entrepreneurial experience, which I think will apply nicely to a real estate deal. I want to learn real estate and I'm applying for several Master in Real Estate programs and MBAs with concentrations in real estate for next fall. I plan to work for a developer or fund when I get out.
However, I want to get my hands dirty now, with experience and exposure by doing a deal or two on my own right now. I don't have a lot (read: any) of money to put into a deal. If you were in my shoes, what would you do work yourself into doing or partnering on your first deal?
BTW, i know it's highly unlikely at this point in my career and I'm not really counting on being able to put together a deal, rather I'm mostly interested in hearing some entrepreneurial ideas from people who have been in the industry for a while and have a better understanding on how things work.
Look at houses in Detroit, maybe Cleveland.
The Silverdome was built for $55 million in the mid-70s....and it just sold for this a few years back. Over 80k seats.
http://news.heartland.org/newspaper-article/2009/12/10/silverdome-bring…
The Silverdome was built for $55 million in the mid-70s....and it just sold for this a few years back. Over 80k seats.
http://news.heartland.org/newspaper-article/2009/12/10/silverdome-bring…
The Silverdome was built for $55 million in the mid-70s....and it just sold for this a few years back. Over 80k seats.
http://news.heartland.org/newspaper-article/2009/12/10/silverdome-bring…]
i took his comment as sarcasm. I've heard that Buffalo is an equally awful market.
what do you mean by "real estate deal"?
you wanna flip a house?
No, I mean commercial real estate. Open to quite a few different options, just trying to get the entrepreneurial juices flowing and hear opinions and thoughts on what others would do if in my situation. Most likely looking at renovating and repositioning a small multi family building or retail site.
One is residential RE, and the other is commercial RE.
You don't think this would be out of your league?
Also, why not start with a residential? You can get the money much more easily. If it goes sour, you don't lose too much of it.
I just don't understand how you think you can put together a deal with no contacts, no experience, and no money. Even to renovate a regular house you have to deal with contractors, permits, insurance, etc.
i appreciate the comments, though i've calculated the risk and think that the learning experience will far outweigh the financial gain/loss.
also: - i don't agree with anything being "out of my (or anyone else's) league" maybe it's just the entrepreneur in me but i strongly beleive in always pushing your comfort zone. -i want commercial experience so i want to do a commercial deal - i have contacts and people that I can able to ask for advice in various areas of the project - i've already flipped a residential property.
I'm not saying that it's possible (the no money/no experience might be too difficult to overcome without gaining at least one of the two), im just curious how others might TRY to do it.
I don't understand how there is any risk involved for you. And I definitely don't understand how someone else would be willing to take your calculated risk for the chance to help you gain some experience...
How did you go about flipping the residential house? Did you use your own money? How did it work out?
also, i guess the main premise behind all of this is:
assuming i do my diligence and source a great opportunity with lots of upside and potential stable cash flows, is it likely at all that the capital contributors (lenders, hard money, equity partners) would look solely at the economics of the deal, looking past the fact that I'm not contributing significant capital or experience other than sourcing/making the deal?
No.
A balance sheet lender will underwrite your personal credit capacity, which I'm guessing isn't much (no offense, me either).
A non-recourse lender won't look at you unless you have a legit operating partner. Even though the RE might be solid your operations could muck it up.
Not big enough for CMBS.
djc,
You say that you've calculated the risk and you think the learning experience will far outweigh the financial loss...and you also said that you don't have any money to put into the deal. So, here are some questions to get the juices flowing:
1.) If the money isn't yours to lose, what do you truly have at risk?
2.) Who would put their equity at risk for your learning experience?
3.) What would you bring to the deal? E.g. if you're not a broker, not a developer, not a financier, not an investor, not a GC, not an architect, etc, how do you bring value to the project?
blankster - thanks, much as I expected, though I figured that many on this forum are also have the same goals and was really just curious to hear if anyone had ideas to make it happen. maybe i should start a property management company to get some experience operating properties and do my own deals, hmm....
febreeze, i used my own cash for the residential deal, bought a foreclosed property completely gutted it and brought it up to above modern standards. Haven't sold it yet, paid 60+10k renovations, current market value 120+. Took a lot of the equity out to start another venture, dont really want to touch any more.
my comment regarding risk was in response to when you said " If it goes sour, you don't lose too much of it.", and you're right, there's very little risk on my part aside from time, reputation and whatever funds I do put in the deal.
again i want to stress, i don't think at this stage in my career it's likely to do a project on my own, i just wanted to hear ideas on how others might try. I have heard many stories about people getting things like this done, since everyone has to start somewhere, but I agree that I probably need to bring a little bit more to the table.
Since I haven't heard any suggestions I start by offering the type of things that I was thinking about/and have heard have been successful for others just starting out:
retail company x wants a location in a new town but doesn't have an in-house real estate team nor a regular developer that they work with in target location , aspiring developer in target location makes/has contact with company x and offers to find them a location and manage the development of it on a fee basis, potential for small equity in the building, possible commission share on the lease. Aspiring developer adds value by finding location, negotiating with land seller and obtaining a purchase option, arranging and managing zoning and political issues, ect. Sure it's a lot for someone without experience to take on, but the learn curve is tremendous and experience unmatched.
another example is aspiring developer has contact who wants to diversify investment portfolio by investing in real estate, but doesnt want to be hands on and looking for an operational partner.
Obviously a lot of trust in both cases but it happens all the time. I'm sure there are many more examples. These are both real examples that I've heard about from my contacts who are commercial real estate brokers. I'm sure that a lot of the time, things like this happen in the brokerage community because the brokers know how to get a deal done, and they finally decide it's time to get some skin in the game on the operational side.
On this forum there are a lot of people who deal in acquisitions and in financing of real estate so I was curious to hear how some of them might go about putting together their first deal, given their knowledge and background in their own niche. I would guess that there are some very creative ways that people are thinking about/have done in regards to both acquiring property (wholly or with a partner) and financing it.
atwoodt, see my response above, it touches on the points in the questions you asked.
duplicate post
I would like to djc's specific question of whether equity partners and lenders would be interesting to contribute capital if he sources a unique opportunity with upside.
On the equity partner side, one critical question is whether djc "controls" the deal. If he has a deal in contract under a PSA, he has some negotiating leverage with an equity partner that wants to participate. However, most sellers will flat out refuse to award a deal to a buyer/operator with no reputation and no capital. After all, what's the upside? If I were the seller, I'd tell djc to talk to me after he has capital lined up, in the meantime I'd try to find another buyer.
Herein lies a conundrum, because djc will probably have to find an equity partner without having control of the deal. That means an unscrupulous partner could pretty easily do the deal with the seller and cut djc out entirely. More honorable firms might offer djc an acquisition fee for the sourcing, but probably would opt to operate it themselves and not give him any slice of the equity. Frankly, that's what I would do. Why would an experienced real estate investor give a guy with no operational experience control of and equity in the deal?
Let's say djc manages to drum up friends and family money or other capital such that he has the equity and control, but still needs debt. Non-recourse lenders, as others here have mentioned, are hyper-sensitive to sponsorship right now. I would give him a less than 5% chance of getting bank, lifeco, or CMBS financing. That leaves debt funds and/or other more exotic lenders that will often look for recourse and charge very high rates. This puts djc at a significant competitive disadvantage to more established borrowers who can do the same deal with very cheap, simple, non-recourse debt.
Djc's entrepreneurial spirit is commendable, and it would be great if he succeeds. More often, though, experience and reputation are important prerequisites, or at least very helpful ingredients, to entrepreneurship. A person with some years of experience at good real estate firms has a much better chance of convincing equity partners to participate in a deal, and a much lower chance of being shafted (since the equity will see a benefit in maintaining the relationship for future deals, and would like to retain that person's operational experience on the project). Also, someone with a solid professional reputation can recover from a couple mis-steps, whereas if djc does succeed in getting money for a first venture that ultimately fails (perhaps through no fault of his own)...it will be virtually impossible to get funding the second time.
Ditto, re-ib,ny. Your second paragraph speaks to my third question/point. Perhaps djc could get a fee for sourcing the deal but he would likely be circumvented.
excellent commentary guys, thank you. It's highly unlikely that I'll even attempt to do a deal before I can bring more to the table. The above is simply a way for me to explore the possibilities, since at this stage that's all I can do. That said, I'm currently working on putting myself in a better position both by saving $ and by gaining education/experience. I'd like to shift this discussion to asking how I might best position myself towards doing that first deal.
Obviously I need some capital to contribute. Noted.
I also need real estate experience. There are a couple of questions here.
First off I'm planning on going back to school next fall. I'm considering both MBA and Real Estate Programs. For MBA I'm considering Harvard, Columbia, Wharton, and NYU (mainly for access to the city and secondly for their new RE concentration). I'm also considering a handful of the top Real Estate Programs: Cornell, MIT, Columbia, NYU, Georgetown.
I would MUCH prefer the Master in Real Estate programs since, not having real estate experience, the curriculum and applied learning is very important to me. However, I've read repeatedly that employers prefer MBAs. I'm researching now for myself to see how true that is. If this turns out to be true I might lean heavily towards the Cornell dual MBA/MPS Real Estate, however I did an undergrad in business there and I already took quite a few classes in Johnson and Ideally I'd like to diversify my network.
My goal post school is to land a position that would give me the necessary experience or knowledge/network to start doing deals on my own. The types of positions I'm considering are:
-Development shops big and small -Opportunity funds -Institutional Investors/REITS that JV with developers.
Are there any other types of positions that I might want to target post school?
Given the types of positions I'm considering and also those that you might suggest would you recommend the MBA or Master in Real Estate/Master in Real Estate Development?
Thanks everyone for contributing.
The easiest investment I can think of where you could "get your entrepreneurial juices flowing" would be to take your small amount of $ and buy a quadplex with 96.5% leverage (thanks Uncle Sam). Cashflow the mortgage payment (also avoid paying "rent"), make cosmetic improvements in order to build up some sweat equity- suck it out and leverage it into another deal. I'm sure everyone on here would advise you not to, but I tried it out and it worked (prob wasn’t worth the time or trouble).
On the flip side, you’d probably have to use a pretty high discount rate on your analysis, to justify the opportunity cost. After all, the starting salaries at Harvard don’t look to bad…look at the private equity column.
http://www.hbs.edu/recruiting/mba/data-and-statistics/employment-statistics.html
"febreeze, i used my own cash for the residential deal, bought a foreclosed property completely gutted it and brought it up to above modern standards. Haven't sold it yet, paid 60+10k renovations, current market value 120+. Took a lot of the equity out to start another venture, dont really want to touch any more."
how is the rest of the neighborhood where the property is located? were there other foreclosures nearby?
Also, the "Retail company x wants a location in new town" approach is not for 20-somethings who haven't spent time in commercial real estate. I know multiple guys who do that and they have years and years and years of commercial real estate experience, and relationships are key. You're probably not the only one who wants to be the "preferred developer" for Dollar General in your region. Try calling up their head of real estate and see how open they are to the idea (joking).
thanks for the additional comments, i understand completely. Can i get some comments and opinions on the career paths and schooling options that I'm considering? Also others that I havent listed above?
febreeze - sounds like you're suggesting that I try to duplicate my resi deal. Doesn't seem to be a lot of opportunity for that in the same neighborhood. I just got lucky being in the right place at the right time on this one.
if that's not what you're suggesting, the neighborhood is stable with long term residents (it's actually a townhouse in a detached multi-unit development) and not much activity at all, yet alone foreclosures. Many of the other properties haven't ever been renovated since the project was completed 30 years ago. Will be interesting to see if opportunities come up as some of the original owners retire and move out.
I wasn't suggesting that. I was actually afraid it could be tough getting rid of a property that's valued higher than the rest, seeing as you renovated it.
What's the maximum time period you're willing to keep holding on to the property?
Just want to say this is a great thread, thanks for the comments. Would love to be able to do a small deal in my market (Toronto) but there are few opportunities to be had with how hot the market is. Will have to wait for our correction before I dive in.
.
Fantastic thread.
Since i didn't get any takers on the job/school question above I'll simplify it a bit:
What type of jobs roles or companies would give the best experience for starting eventually breaking out on my own? Currently considering development companies and REPE funds. Any other roles/types of companies that should be on my radar, and WHY? ----- Obviously there are many niches in real estate and many types of investment / operating companies that will provide great real estate experience so let's not get into that discussion.
Simply put , in your opinion, what are the best career options (other than REPE and Development), and how/why are they relevant to someone that eventually wants to break out on their own.
mogul - i actually have a similar plan, though i have some questions about your assumptions (I'm not currently in the industry so please enlighten me).
1) From what I've read 80% LTV first mortgage seems near impossible today. Thought that we're realistically in the 60-70% range? Maybe the GSEs are offering higher?
2) Also read that first lenders are increasingly opposed to having second mort/mezz/hard money contributing a majority of the required equity. Thoughts?
Sorry if my post had incorrect figures (cannot give too much detail without giving my self away, but I am probably not familiar with your current financing market). The real point is the structure of the capital stack and how you can do deals with very little or no equity.
I think that obtaining a second is fairly standard. Would anyone have hard facts on this? As for Mezz or other personal loans, if they are from friends/family/acquaintances, why not give a personal interest only loan that is not tied to the property. The primary lender does not need to know. Once the first deal is out of the way you have reputation and capital and it should get easier.
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