In my conversation with Joel Florek, who is a 23-year-old real estate entrepreneur in the multi-family niche, he explained how he was able to obtain his second investment, a 16-unit property, for only $5,000 out of pocket by using creative financing and the art of negotiation!
Joel’s main aim for investing is to purchase multifamily properties and hang on to them over the long-term to provide him with monthly cash flow, which he will then use to purchase additional investment properties. With this plan in mind, before purchasing his first property, a 4-unit, he went to a local commercial bank that allowed for more creative financing structures, and presented his investment plan for the next 6 months. Joel knew that he wanted to eventually get into larger, commercial properties, so even though his first investment was a 4-unit, he decided to sacrifice a little bit of the cash flow so that he could begin developing a relationship with the lending department.
Ultimately, this sacrifice paid off, because after successfully completing the 4-unit deal, Joel went back to the same bank with another deal, a 16-unit property. Since he had already shown success, the bank was extremely excited to move forward.
- Joel found the lead from a carpet installer during renovations of his 4-unit
- The 16-unit property was built in 1993 and the original owners were looking to retire
- They were asking $700,000
- That NOI was $70,000, which priced it at a 10% cap rate
After obtaining the seller’s contact information from the carpet installer, Joel reached out and took the first steps towards build a relationship. Joel believes that it is extremely important to be transparent and honest when speaking with sellers and to never mislead them about your capabilities as an investor, so he made it clear that he was a younger investor, that he currently owned a 4-unit building, and that he wants to grow. Next, they worked through the property details and financials, where Joel was met with a few problems. He realized that the numbers weren’t great at a $700,000 purchase price, and since he is such a young investor, he would need to come up with a creative financing structure to fund the deal. As a result, he went into problem solving mode, and (1) began creating a detailed financial and management plan and (2) started reaching out to friends, family members, and investor groups he had met through BiggerPockets to raise money for the 20% down payment.
While his financial and management plans were solid, Joel faced another problem: he was struggling with trying to convince investors that he was someone that was credible enough to complete the deal and manage it efficiently after closing. Add in that the property was in such a small market (population of ~15,000), his age, and his lack of experience, he was unable to raise a single penny.
At this point, where many investors, and especially newbie investors, would have given up, Joel continued to persist. He reached out to the seller, and continuing to be his transparent honest self, he communicated that he had the plan and two banks behind him, but he was unable to secure the private money needed to meet the terms of the bank, so unfortunately, he wouldn’t be able to move forward at this time. Much to Joel’s surprise, the seller’s responded with “give us a week and we will call you back.” And one week later, the seller’s called him back and offered a seller finance deal, which included the 20% he needed as the down payment.
After a back-and-forth negotiation with the seller, Joel was able to get the property price down to $685,000. The seller offered $110,000, and Joel negotiated the terms down to a 2% interest rate amortized for 10 years. He got $550,000 from the bank, and since he had two banks competing for his business, he was able to negotiate and have the $3500 in closing costs rolled into the loan. Therefore, with $110,000 from the seller and $550,000 from the bank, and add in the prorated rents and taxes he obtained, he was only responsible $12,000. The creative financing doesn’t stop there, because Joel also obtained a $7,000 personal loan from Wells Fargo (which he is almost done paying off), so he only had to bring $5,000 of his own money to the table.
All in all, Joel found a lead from a carpet installer, obtained funds via 3 financing methods, a commercial bank, seller financing, and a personal loan, which allowed him to purchase a property that cash flows $2,000 a month for only $5,000 out of pocket, all by the age of 23 years old. Talk about a success story!
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.