Getting Sponsored

Posted on November 11, 2014 by

Multifamily real estate can be one of the most profitable real estate business models but it can also come with some barriers to entry. Qualifying for a loan to buy apartments can be challenging but not impossible. One of the major misconceptions today is that a bank will lend only on the value of the property and will not look at your personal financial standing for the loan qualification. This simply is not true. A lender will always look at the financial wherewithal of the borrower. The good news is that you can have partners that bring some of the things that you may not have and help you to qualify for a loan.

What I am discussing here is what we call a “Sponsor”. A Sponsor is a partner that brings the needed qualifications that will help you get the loan and the deal done. Sponsors can bring many things to your business besides money and net worth. They can bring experience too. Let’s start with the money side first.

Most banks and lenders will want you and your team to have a net worth greater than the loan amount. If you want to qualify for a $1,000,000 dollar loan then you and your team will need to be worth at least $1,000,000. If you don’t personally have that much net worth then you will need to bring on a partner or partners that do have it, in order to satisfy the lender. Net worth is a gray area that will ultimately be judged by the lender, but for this conversation I will give you some guidelines from the loans I have done.

Not all personal equity will be valued the same. For example, if your partner is a lawyer and owns their own law firm the lender may discount or devalue the firm as far as net worth is considered. The reason for this is that the law firm would only have value if your partner was there to run it. If your loan goes into default the bank would have a hard time liquidating and getting money out of that type of asset. Cash is always counted at face value. Other assets like equity in other real estate holdings carries high value. The more tangible the asset, typically the better valuation a lender will give you for it. Once you find a partner or partners that have the net worth that will allow you to qualify for loans you are half way there.

Experience may also come into question when qualifying for a commercial loan. Most lenders want to see that you have “like kind” experience. If you are trying to buy large apartment complexes then having a team member with ownership experience would help greatly. Experience is important to lenders. Your first loan with a lender will most likely not be a multi-million dollar deal without some current or past ownership of similar assets. They will want to see that you and your team have some experience with properties that are similar in order to give you the loan.

Remember that a Sponsor is going to help you guarantee the loan for your deal. This means that they are a full partner and will also share in the risk. They will want some equity in the deal for this. Most people ask me how much a Sponsor should get for doing the deal. There is no text book answer for this. The only answer I can give you, is to give them as much equity as it takes to get the deal done. Don’t be cheap. You need them to do the deal. Once you have done a few deals you will be able to sponsor your own deals and you won’t need partners anymore but you have to do the first few deals to get there so….don’t be cheap.

When networking for Sponsors always ask two questions. What does this person have that I need and what do I have that this person needs? The best business partnerships are created when each person brings something totally different to the table. By answering the first question you can decide if they are who you need on your team. That is the easy part. The second question is not as easy. You need to make yourself as valuable as possible. If this partner has the cash or experience you need, why would they partner with you? The first thing you must always bring to the table is a real estate education. Get as much info from real estate educators as you can possibly handle. Go to as many events and read as much of the material as possible so when you do meet the right partner, you are valuable. There are a lot of people in the world that have high net worth but don’t necessarily know anything about real estate. That is the best way for you to be valuable to them. If they want to invest in apartments, they will need an industry expert to do it and that is you!

Good Luck,

Bill Ham

Bill HamBill Ham has been investing in real estate for 8 years and has created a portfolio of nearly 400 apartment units in Macon, GA. He created his entire real estate investing portfolio using creative and seller financing.

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