Creative Financing Strategies for Commercial Real Estate (No Banks Needed)
In today's episode we learned about creative financing strategies for commercial real estate that don't require relying solely on traditional bank loans. The speaker discussed alternative options like seller financing, joint ventures, crowdfunding, and lease-to-own agreements that can help new investors purchase properties without having to meet strict bank qualification standards. A key takeaway was considering factors like one's financial situation and experience level when determining which strategy is the best fit. The presentation also emphasized how being creative and persistent can provide access to capital beyond just banks to begin investing in commercial real estate.
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Key Takeaways:
Seller financing, joint ventures, crowdfunding, and lease-to-own arrangements are alternative financing strategies that can be used to purchase commercial real estate without relying solely on traditional bank loans.
These strategies can help circumvent strict bank qualification requirements like credit scores, cash reserves, and experience.
Factors like current finances, experience level, the seller's situation/motivation, and flexibility needs should be considered when choosing a financing strategy.
Being creative and persistent can open doors to capital beyond just banks to start building a commercial property portfolio.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
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securing financing remains one of the biggest hurdles for commercial real estate investors, especially if you're just starting out traditional winning sources like banks have strict qualification requirements like solid credit scores, considerable cash reserves, proven experience managing an investment property and more. Are you serious? I'm dead serious. So how else are you supposed to get started? Well, for newcomers to commercial real estate investing, it can seem almost impossible to get that crucial financing to purchase your first property, but there are creative financing strategies that you can use. To get around these conventional barriers. Let's explore some alternative financing methods to help you secure the capital you need to begin building your commercial real estate portfolio. And at the end of the video, I'm going to share a story with you where one of these strategies saved me from losing over $100,000 At the very last minute.
First, seller financing seller financing is when the property seller essentially becomes the bank and carries the mortgage for you as the buyer no bank needed. That's what I'm talking about. This route circumvents traditional winter qualifications and downpayment requirements and can be significantly easier for you as a first time buyer, especially if you're able to build a strong relationship with the seller qualifying is much more focused on the real estate opportunity itself and the sellers goals for selling the property rather than your financial profile. Seller. financing terms can be night and day different from a traditional bank loan when it comes to points like the length of the loan, the interest rates that you'll pay and how much of a down payment you'll need. with seller financing you can get as creative as you want and need don't have enough cash for a down payment. See if the seller will finance 100% of the deal. Want a longer term on the note so that you don't have to worry about selling the property or refinancing the note to soon see if the seller will give you a 15 year term or longer seller financing is also easier to secure if you have some investment experience under your belt or at least someone on your team that does using the property's value to back the loan. A seller may accept good faith terms if it means smoothly exiting their position. seller financing can also be a major benefit to sellers that just want passive monthly income because you'll be paying the mortgage to them each month for as long as they have the loan. Joint ventures pooling resources together with other investors can give you the combined financial firepower to do much bigger deals forming a joint venture partnership allows you to take on more promising commercial real estate investments by sharing equity stakes mortgage responsibilities, repayment of other investor capital over time and everything else. align yourself with seasoned partners who bring their own capital expertise and connections to the table leverage a joint venture to take on a promising deal. Even if you couldn't finance the entire purchase single handedly I utilize this strategy on the first project I ever did, which was a 42 unit townhome development about 15 minutes southwest of downtown Nashville, I found a piece of land where we could build all of these townhomes for a great price per door. Back then it was only $23,800 per unit for the land, which is pretty wild considering how expensive everything has gotten today. And I pitched it to a developer that I knew built a lot of townhomes. I didn't have the cash or the experience. But I had found an outstanding deal which can be very valuable to bigger investment groups, I was able to joint venture with their team on the project, and they brought the capital, the debt and all of the resources necessary to do the deal while I put in sweat equity as the project manager for a couple years in exchange for 10% of the project. Joint ventures are a great way to get started if you have a good relationship with more seasoned investors because you can lean on their resources and their track record to get started and you know, they won't let the deal go sideways crowdfunding crowdfunding platforms like crowd street enable you to raise funds from a larger pool of investors through a fund or a syndication this strategy provides capital to get into a deal without taking out massive personal loans to cover your equity portion of the deal or can help you if you have the cash but you need to keep it on hand. Because you're aiming to scale the amount of investments that you have. The crowdfunding route also helps diversify your investor base. If you have an interesting or successful project these platforms will promote it on your behalf alongside your own marketing efforts. To help you find those new investors. You'll simply provide details about the property your investment strategy and your track record on the platform and smaller investors can contribute equity investments as low as $10,000. To participate at this point you're taking on silent partners. So managing communication across multiple stakeholders will take additional effort and there are regulations around how these deals are to be handled chiefly from the SEC. But tapping into the crowd provides capital to act nimbly on commercial opportunities. The most important thing that you need to keep in mind here is that your track record is of utmost importance. Investors want to place their capital with cease And investors that have been there and done that and know exactly how to pull these deals together. If you don't have that experience yourself, consider bringing in a partner that does, you can typically find them at networking events through associations like the Urban Land Institute. And don't be afraid to send cold emails or make those phone calls lease to own where they lease to own arrangement, you rent the commercial property with the option to purchase it outright in the future. It's a way to get control of a property without requiring immediate financing for the full purchase amount during the lease period, you can save up for a down payment or work to enhance the property financials before obtaining permanent financing three to five year terms are pretty common here, which is a typical link for commercial leases and should give you enough time to get your ducks in a row on the purchase clearly define the future purchase price or mortgage rates if you're combining this one with seller financing as part of the agreement, use the lease to own interval to strengthen your financial position and secure future financing on more favorable terms. My brokerage team negotiated a deal just like this few years back for a nonprofit organization that wanted to eventually acquire the property they release it there were significant improvements necessary to bring a space up to conditions suitable for them. So the landlord agreed to discount those costs from the appraised value of the property. When it came time for them to purchase. A portion of the monthly rent also went towards paying down the purchase price. When they finally did decide to move forward, the landlord agreed to hold the purchase price for the first three years of the lease at $3.7 million. The purchase price then went up from there each year considering the value of the real estate was increasing. And if the tenant didn't exercise their purchase option by the end of the fifth year, they would lose the right to purchase the building. The tenant ended up exercising their option got the property they wanted at the price that worked for them when they were financially prepared, and the landlord was able to walk away and 1031 Exchange into a self storage facility. And that brings us to the story of how one of these methods saved me from losing over $100,000 At the very last minute. In 2021. I was under contract to purchase a tower in downtown Chattanooga with a bunch of investors from whom I had syndicated capital, we'd raised all of the money, we'd spent a bunch of money on planning what we were going to do with the project we'd already secured debt from a traditional bank to go ahead and close the project. But a week before closing the bank for whatever reason decided to back out of the deal, they no longer wanted to find our project. Nice center for me. Here I am about to lose all of the money that we have spent on our pursuit costs on this deal and I got creative with it. This is where you come up with a brilliant idea that no one else can see let's hear so I called the seller I told them what was going on and negotiated seller financing with them for them to carry the note for a 24 month period I don't like to take no for an answer ended up saving me a lot of money and made the seller happy because they were able to get some passive income coming in and we close the deal on time. Now that we've covered the most viable creative financing methods for commercial real estate. How do you choose the right strategy for you consider factors like your current finances and experience level whether you'll have reliable partners or not the seller situation and their motivation and the amount of flexibility that you need. getting creative with financing opens more commercial real estate doors today and sets you up for larger deals in the future as you establish your track record. Of course learning on YouTube is helpful but the real learning happens in the field. The bottom line is that with persistence and creativity there is capital available beyond old school bank loans comm to put these alternative financing strategies to work so that you can begin building a thriving commercial property portfolio. Now that you know how to get creative on financing your first project you've got to actually go out and find a deal. Check out this video here on the easiest commercial property for beginners to own
This episode of Office Hours covers strategies for commercial real estate investing, brokerage, and career growth as Tyler Cauble takes live questions. He also discusses upcoming projects like a brokerage mastermind and hiring an investor relations lead.