Securing Private Funds for Commercial Real Estate Deals

As you may well know by now, private money funding is one of several options you have for funding a commercial real estate deal. The real trick is to know where to find such funding, and then to know how to lock it in so you can properly use it. I’ve used my share of private money over the years and what I've found is that private lending success comes from two key things: how you present yourself and how you present the deal. 

Presenting yourself to a private lender needs to revolve around your professionalism and your commitment to the types of deals you do. For this reason, a simple summary proposal is a nice touch, when you first begin visiting with a particular lender. In such a proposal, you can provide snippets of your business philosophy, history, experience, etc. You can also show examples of how you would handle a particular deal, giving a lending prospect a quick idea of what it is like to do business with you. 

There are several ways to put together a summary proposal and there are a similar number of things you could call it. The bottom line is that if your business is worth telling people about, it’s also worth putting in writing, and a person looking to learn more about you is less likely to want to read a full-blown business plan that is less relevant to their immediate interests. 

Once you have gathered some interest from private lenders (not to understate the importance of this step), the next step is to actually present a deal to them when one comes your way. How you do this will be very important, given that your credibility with a seller will be somewhat dependent on your ability to not only attract funding, but also have it when you need it most. 

When putting a project summary together, remember the key components that are important to you when you evaluate a commercial deal for your own business. First, there is the price tag, which should be competitive, relative to market value. Second, there are the market conditions, which should show some stability and also signs of good future growth. Last, there is of course the property’s cash flow, which should be acceptable to all parties involved. Once the basic elements of a deal are in place, then you can really dive in and start negotiating the terms of use for a private lender’s funds. 

Don’t ever forget that using private money is serious business, so make sure you have a good team in place to support your efforts, and be sure to treat a private lender’s funds as carefully as you would your own. These two things can really simplify the use of private money and open key doors of opportunity for your commercial real estate business.

The Sweetest Aspect of Commercial Real Estate Investing

Without a doubt, one of the greatest aspects of commercial real estate is the tremendous value of the properties that are out there and available for purchase. The natural question arises, ‘What determines value?’, and that is perhaps why you’re reading this.

The first determinant of value has to do with how you find your property deals. I have found that the greatest path to value comes from uncovering the diamonds in the proverbial rough. This means building your business upon a foundation of networking, rather than just searching through open networks like the MLS. While there are deals to be found here, they are often not the best ones.

The real gems come from referrals. Referrals come from other investors, bird dogs, and team members who “know someone who knows someone that might have a property they might want to sell”. I think you see what I am getting at here and the better you are at setting up these kinds of professional networks, the more referral deals you’ll have come your way. Sure, not all will be true deals but it will mean more potential deals coming across your desk, allowing you to better play the numbers game.

The second aspect of value has to do with the cost per unit of commercial real estate. In this regard, commercial properties that are good deals are almost always going to have better cost per unit value than single homes. For example, a single family home that rents for $800 a month in Market X has a market value of $100,000 and an approximate cost per unit of $900, not even really accounting for property maintenance or management.

Now, let’s consider a 4-unit apartment in the same area that commands the same monthly rent. In most markets, the price would be less than the value of four individual homes, in this case less than $400,000. That inherently improves the value of the property, on a cost per unit basis. Add to this that the fixed monthly expenses (e.g. taxes, insurance, maintenance, etc. are for one building instead of four, and you should quickly see how value builds with commercial properties.

Taking the model one step further, would a 100-unit complex be worth 100 times the value of a single home, rents being equal? Not likely, and the cost per unit would likely be far less than for a single home. This is just the tendency in most any real estate market in the country, and when you consider the tremendous boost in value that this gives you, the underlying value of commercial real estate becomes much more clear.