One of the advantages of running an investment group is that you get to meet a lot of interesting people, while also discovering many investing opportunities. My one buddy who used to run the meetings with me not only became a pretty good speaker, but he also became good at raising private capital. He had a good personality, he was very trustworthy, and he did what he said he would do.
In the beginning, we were just raising private money to do small real estate deals. In fact, I probably did more lending than borrowing. But it wasn’t long before we started raising money for larger investing opportunities. At first, we were raising money for commercial office condos and pools of notes. I pretty much stayed in the note space, but my buddy morphed into student housing, and although we’ve taken different paths, we’ve both done pretty well.
When Opportunity Knocks
At the time, we were entering the downturn, and it was tough getting banks to refinance rehab properties, so the timing to enter the student housing market was good. Residential lending was getting so strict that the only loans they wrote seemed to be FHA, owner occupied loans. If you were a self-employed borrower, just forget about it.
It was also perfect timing, as a large university in the Philadelphia area was expanding quite rapidly and didn’t have enough off campus student housing to go around, and my buddy recognized the opportunity.
Having a Plan
At first, my friend started to assemble his team. Since he was previously a lender, he was smart enough to be constantly meeting with bankers to test the waters as far as the types of loans they liked in the current market.
What he discovered was that even during the downturn, the banks were shying away from residential mortgages in their portfolio, but they loved lending on commercial properties, especially ones that cash flowed, like apartments.
He glanced at apartments, but in the Philadelphia area it’s tough to find ones that make sense. You almost have to wait for someone to die. What he quickly figured out was that the student housing cash flowed much better than apartments—and so that was the path he would take.
The good news was my friend already had experience raising private money and doing rehabs, so this was going to be a piece of cake. He quickly learned that his end-users were students, but the real renters, contractually, were the parents, even though they both signed the leases.
The beauty of this was that he was now going to buy fixer-uppers near the college and then do a nice remodel job with granite countertops, security systems, and amenities that would appeal to the parents and the students. Often, he was even lucky enough to get rents paid for the semester in full or have them leased for the entire year instead of just the semester.
His first steps were to use private money to purchase and rehab the properties. He had one entity to do the rehabs and another entity to do the property management piece. He also brought in a high income partner to personally sign on the permanent commercial exit loans. Needless to say, the banks loved lending on a high cash flow, commercial property.
Fast forward a few years, and my friend had several hundred student properties in a portfolio worth approximately $18-$20 million that he has a plan to pay off in a 10-12 year period. All of this was accomplished with none of his own money or credit and in about a three-year timeframe.
As you can see, a lot can be accomplished just from having the ability to raise private money the right way. My buddy always put his investors first, as he can see that none of this would have been possible without them.
So, guess what happened after he paid back all the private money with the lower rate commercial financing? You guessed it—he has even more capital at his disposal as his track record and reputation have continued to grow.