Understanding Creative Financing for Multifamily

To fully understand the art of obtaining creative financing for multifamily, you must first understand what money really is.

Money was invented to make trading easier. Instead of always having to have goats and chickens around to trade, we created currency. Over the years, that currency has changed form from seashells to gold coins to paper backed only by the confidence in our government (fiat currency). No matter what form money takes, it has always represented one thing: cooperation.

If two people are unwilling to cooperate or trade with each other, money has no value. If you are alone on a deserted island with $1,000,000 in cash, it has no value. The money only has value when someone else agrees that it does. By itself, it’s actually worthless.

That is not a hard concept to understand, but it reveals something important. If you remove the money in a deal, you are just cooperating with others. You use money simply to facilitate that cooperation.

Let’s work backward for a minute. What are you trying to do in real estate? Buy good deals that make money. What does it take to buy those good deals? Money! So, what if you don’t have any money?

If it takes money to do business and you don’t have any money to get started, then you have to fall back to the one thing that you do have and can create: cooperation. If money is cooperation at its core and you can create cooperation with the people that have what you want (sellers), do you need money to get started?

NO!

All the real estate in America (and in most countries) is already owned or controlled by someone else. There are no more “land rushes” where settlers can run out and stick a flag in the ground and claim that land. Someone already owns it. Now the trick is to get the people who already own all the land and properties in the country to give them to you.

This is where cooperation comes in. If you have all the cash laying around in a checking account to buy all the property you ever want, then you are probably not reading this book. But you do know who has what you want (sellers) and that you don’t have to spend the cash to get what you want (properties). So, it’s time to create cooperation.

Start with Problems

There’s one thing that is common among all people:

Problems!

It doesn’t matter whether you are rich or poor. It doesn’t matter whether you are just starting in the real estate game, or you have been here for years. Chances are, you have problems. See where I am going with this? The people that have the deals that you want to buy are likely to have problems. If you can find ways to solve those problems for those sellers, then you will create that cooperation. Remember this simple equation:

Cooperation = Cash

If a seller owns one of those 79 “other” deals that is not good, then chances are they have problems. At the very least they probably can’t get someone to buy their property at the moment. They may have occupancy problems. They may have repairs that have not been done for a while. They may not be able to manage the assets anymore. They may be a “burned-out” landlord.

If you can solve seller’s problems by creating cooperation, then you don’t need to be rich to get started in the real estate business. Creative financing for multifamily is based around creating value through problem solving.

Problems = Areas of Opportunity

You must start with the right attitude for getting the business. Then you can use specific techniques to solve people’s real estate problems.

There are a few easy ways to identify problems in your market. These problems are seller problems as well as investor problems. In the chapters to follow I will show you how to create solutions to these problems that will result in creative financing.

Sellers and local investors are the greatest source of creative financing for multifamily. Here is a list of problems to look for in your markets.

When Working with Sellers

1. Distressed assets
   • Deferred maintenance
   • Low occupancy
   • Bad management
2. Burned out landlord
   • Tired of dealing with current management (bad management)
   • Tired of spending money on the property
   • “Accidental” landlord. Some people inherit property and don’t really want to be in the business.

• Cannot find qualified buyers
  • This can be a real problem in a down cycle for most sellers. Many buyers have exited the business or are waiting on the sidelines to get back in during an up cycle.
  • Look for sellers who have had a deal fall out of contract more than once. These sellers will be motivated and educated on the lower value of their property.

• Taxes!
  • Creative financing can be a way for sellers to mitigate tax liabilities. If a seller finances a deal to you, they will only pay taxes on the profit they receive. This is usually the interest you pay them for financing. Get with an accountant to verify any tax mitigation plan before making an offer.

When Working with Investors:

1. Getting low returns on current investments
2. IRA / 401K giving low returns
3. Don’t know how to invest in real estate
4. Don’t have a real estate education
5. Can’t manage or run a property but want to be in the business
6. Don’t have the time to find good deals
7. Don’t know that there are people that want to borrow their money and give them higher rates of interest
8. Real estate provides great tax benefits   

I built my entire portfolio on the one concept of creating value by solving problems. I started with almost nothing in a bad neighborhood. I clawed my way out of that area by creating more and more value through real estate problem solving. I found sellers and investors that needed my service, and I was rewarded with my portfolio and the income that it produced. I used creative financing for everything when I built my first multifamily portfolio.