Step 6: Raise the Capital

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host.

Welcome to episode number 121 of the Insider's Edge to Real Estate Investing. This is your host, James Nelson. I'm principal and head of Tri State Investment Sales for Avis and Young. Thank you, thank you. Thank you as always for joining. It means so much to me. If you haven't subscribed already, please do and leave your ratings too. That is what helps spread the word of the show. The whole point of this is to make you the most successful investor possible. We want to get the word out on how to do this and how to outperform the market. After doing about 100 plus shows of interviewing some of the legends in the business and so much content and great advice to review and go back and listen to those earlier episodes. We're now in the midst of a series, a 10 part series. Well, I guess 12 if you include the introduction, which is my story and the episode on why Real Estate that I've been doing with my writing partner Rachel Hartman. She's fantastic. Not only has she written for various Fortune 500 company, she's also a regular contributor to U.S. news and World Report. We are now working on a book together which will be out in January. And this is everything you need to know to become the most successful investor possible. And today episode is on step six which is raising the capital. And you know, this is obviously a critical step when you find an opportunity to have the capital to execute on it. I think it's also the step that is probably the reason why most aspiring investors fall short. This is where fear starts creeping in. If you do not have the money raised to go out and find transactions, it can really hold a lot of people back. So we're going to talk through that today. And you know, some of the advice that I give especially for those starting out is if you do not have this network, you know, starting with a partner is a great way to get into this to work with someone who has a great investor base. And then over time as you do more transactions, we're not, we're going to talk about in this episode about how to build, build this investor base. So I think you're going to get a lot out of this episode. We're going to have a brief word from our sponsor. We'll be right back. Before we do, just if you haven't checked out james nelson.com I built this site for you. That's where you can find the podcast with the show notes, other helpful links and a video series that walk you through this as well. So thank you again for tuning in. We'll have a brief word from the sponsor and we'll get right into the discussion on Raising Capital A different approach to Putting our Clients first Avis and Young's Tri State Investment Sales Group sells multifamily office retail, development and specialty sales throughout the New York metro area as experienced thought leaders in their industry. Our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and and teamwork. We share core values of hard work, integrity and expertise. We put our clients first, providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter LinkedIn and Instagram amesnelsonnyc to learn more. Welcome back everybody. James Nelson here with my writing partner Rachel Hartman. We are having a lot of fun here. We are, we're walking you through step by step. We're not just walking, we're running. We're moving fast here and hoping you all are keeping up with us. But we're having a lot of fun because not only are we putting out these podcasts, but we are working on this incredible book, the Insider's Edge to Real Estate Investing, scheduled to launch early next year 23. So you know, get ready. We could not be more excited. So Rachel, we've covered a lot of interesting steps so far, so maybe you could give our audience a quick lead up if they've missed our last few episodes. And if you have, I highly, highly encourage you all that you go back and you listen to these in sequence because we are continuing to build on each episode. But just to remind you, like you know, if you like watching Netflix series and you binge watch, you always get the first minute or two of in case you missed. So Rachel, what's everyone missed? Or maybe you can remind us of what we've talked about so far to set the stage for today's show when we're going to be talking about raising capital, which is super important. We've been talking about how to find these great opportunities, but we're going to also talk about how to raise the money to execute on them. So, Rachel, take it away.

I'm so happy to. Yeah, we've had plenty of insightful conversations so far. So if you're just tuning in, do go back and listen to them. James is incredibly insightful. He's super quick. You'll get so much information in not much time. And these are the details that you can really put to work. You know, the ones that you can put into action and our actual takeaways. We started out by talking about the different types of investment. We looked at some of the great advantages that come with real estate investment, especially the ways that you can play off the way the market is set up. You can actually take advantage of the inefficiencies in the market and use that to your advantage to really build value and get great returns. We talked about what I thought was an essential first step, which is looking at the different property types and deciding where you want to start. And James in that episode offered great input for first time investors. So listen to that one. We also went into the value of building a team. This is not an individual sport, it never will be. So you've got to have your players in place. And that actually starts from day one. And those players can be used to help you find great opportunities. Obviously, not all properties are the same, so you want to make sure that you can find those gems. And James talked us through exactly that. He went through a virtual walkthrough with us, which maybe is my favorite episode. We learned incredible information about him in that, including that he was in a building on fire, but he is still with us to give podcasts. Good. And so after that, we talked about how to go about determining real value. That's an essential step. You want to know what you want to pay and how that will play into your return. And that definitely varies from investor to investor. So that's a great episode. Today we're moving into another hugely important step, which is raising capital. And James, I'd love it if you could talk to us just to kind of start this off, if you could talk to us about some of the challenges I hear raising capital. And I think, what are we facing as new investors? What do we need to be solving for?

So, Rachel, as always, awesome lead up and you gave a great overview, and this is so important. And I know we're now kind of in the middle of our steps, but this is almost something that I feel like we should have even brought forth Right out of the gate. Because I've got to say, raising capital, this is the number one thing that holds investors back. So we got a lot of aspiring investors who are listening to our show. They're looking at deals, they're thinking about jumping in. The number one reason why people do not jump in and do this is because of the fear of raising capital. And it is scary, right? Unless if you are independently wealthy, maybe you've had some great fortune, maybe you sold your dot com business or maybe you've made a killing in crypto. The challenge is that people are coming into this without a lot of working capital. It can be daunting, especially in markets like New York City where, look, things move quickly. And we talked in some of our earlier shows about having that team ready to go. That's because in New York and you got to put 10% hard deposit down day one. That means non refundable, right? So you've got an investment that you'd like to do and let's say it's a two or $3 million deal, they're going to be looking for two to $300,000 down on contract signing that's non refundable. This is not like, you know, a residential deal where, hey, I got a financing contingency and if it doesn't work out, I get my deposit back. So, I mean, that could be very daunting because if you do not have that capital lined up, yeah, you've got, you've got capital, you've got your money at risk. So, you know, I think that, you know, to just go a little bit further down this road because I think it is important as people think about where to start investing. Because look, maybe New York City is not the place where you want to start unless if you have that, that partner that you're going to bring to the table, Tom, upfront, who might put that deposit at risk alongside you or you know, they've got a track record where they've got the balance sheet where if you need them to close, they can. Right? So you've got that backup plan. But look, there are other secondary and tertiary markets where you can tie up a deal for as little as 20. As little as. I sound like that late night infomercial for as little as no. $25,000 in some cases can tie up a property that's even, you know, a million, 2 million, 5 million, probably not 10 million. But the key thing is that money is refundable, right? And there's probably a lot of listeners who say, okay, I'M if I find this incredible opportunity, I'm okay, clearly with, you know, coming up with 25, 50, 100,000. That's probably where you need to be to kind of get in the game here. If not, you know, probably think about working for somebody else, building up your, you know, your reserves so you've got the ability to do that. And as I always say in these shows, you know, you got to, you know, be willing to lose that as well. Right. This is, this is not, you know, I'd love to say every single deal you're going to double, triple your money, but, you know, sometimes market conditions change. So, you know, but you're going to need to at least have that working capital, you know, even in a secondary tertiary market to tie things up. Right? And look, if things don't work out, and the way that works is you typically get a 60, 90 day due diligence period where, you know, if it's written the right way and you got the right attorney, you know, generally you can get out of these situations, you know, for a variety of reasons. That being said, I'm not, listen to me, everybody, very carefully. I'm not recommending that you go out there and try to tie up deals that you cannot perform on because your reputation is so important. And even in a huge city like New York, brokers talk. And if we hear there's someone who ties up a deal, which for us means just taking a contract, you know, if I've recommended you to my seller and I've sent you a contract, you know, I might be saying no to five other buyers. And if you don't perform or you retrade for, you know, no good reason. I mean, it's one thing if there's something that everyone comes up with, the seller wasn't aware, we weren't aware, you find out there's a renegotiating price, that happens. But if it's just like you can't pull the money together, you're probably not going to get a lot more at bats. So hopefully, Rachel, that kind of paints the groundwork because how you come to the table, your credibility, this is really important. But also managing risk, going into the right situation where this is your first deal, you know, closing on a situation where you got 10% down and you got to close in 30 to 60 days, that might not be the first thing to get into. Unless if you have a very experienced partner along with you.

Exactly. Great intro. Thanks for getting us started on this discussion. So I feel like I'd like to go Over a few terms that you often see come up during this process, you often hear about capital equity. Sometimes you'll hear sweat equity tossed around. Talk us through what those mean, how they compare, how they play into this step, right?

And we are going to have an episode where we're going to have my friend and business partner, Derek Akin come in and talk about the capital stack and the sources and uses and all the different components to an acquisition, right? So when we think about equity, right, and that is the cash that you are bringing to the table and then the debt which you're going to go out and borrow and, and then you get depending on how complicated the transaction is. And we're going to go through all these different components on a later episode, including mezzanine and preferred equity and how the capital stack, we're going to get into the promote structure and all that. But just so the audience has kind of a working knowledge again that equity, the capital you bring to the table, they are pretty interchangeable. I would. Although when you talk about that capital stack, that includes both the equity and the debt as far as the sweat equity, this is a great way if you're looking to start out, which is what is the value you bring to the table, right? It's probably the deal, right? So you are bringing an opportunity to the table, you know, and most, you know, sponsors, if you're bringing this to a partner, it's going to have to be something that they haven't already seen somehow. You know, you got this off market, you have an inside track for whatever reason, you have the deal, right? And so if you bring that to a partner and let's, let's say for a second, you do not have, let's start with the assumption that you have no money that you have to bring into the deal, right? What you are looking for is an experience. So, you know, yes, go get your mba, go get your master's. But I think there's no better experience in actually getting in the deal. And I think if you find something and you brought an under market opportunity and say, you know, bring it to a capable partner and say, look, you know, I'll bring this to you if you can just, you know, I'd love to be around for the ride if you could give me 3 to 5% credit in this deal, you know, I'd like to be a fly in the wall. I'd like, you know, to see how you raise capital. You know, I'd like to have credit for this. So instead of, you know, paying me, you know, an equity broker fee. So let's say we go and find this $10 million deal, you know, give me credit for $300,000. Okay. So when you fill out that capital stack, right. If, let's say we're going to finance, you know, 60%. Right. So there's a $4 million equity requirement. Right. So $4 million of cash, $6 million of debt. I'm, of course, oversimplifying that because we're not adding in closing costs and all the renovations. But, you know, in that math I just gave you. All right, so for $300,000, you know, you're going to give me credit and that, that $4 million of equity that's coming to the table, that's 7 and A. So that's a great way to start thinking. It's a negotiation, of course, but it's a great way to get into the deal, get some incredible experience and really understand how to put something together. And then that's something that you can leverage in the future. We're going to talk about when you're raising, let's say you've already done that and you've got a deal or two under your belt, raising capital, what are these investors are going to look for for a sponsor? So I know we're going to get to that.

Okay, perfect. This is, this is a great explanation. Thanks for talking us through that. So I'm curious, a couple other things I wanted to touch on. You know, when we hear accredited investor, you know, what sort of financial qualifications should we be looking for when we're raising capital?

Okay. And this is where we give our disclaimer that, you know, I am not giving legal or accounting advice. And this is why you need. In fact, I was just on the phone with an attorney yesterday. I'm looking to launch another fund that has been a big part of my career is launching funds for accredited investors. Okay. But there's all different types of different offering plans that you can file. And look, if you are looking to raise capital, super, super important when we talk about who's on your team, you know, having an attorney who is experienced in doing plans, offering plans for real estate transactions. Right. So again, when we. Because that really determines. Right. Of who you can bring this opportunity for. Okay. So. And there's different types of elections. And again, this is where I'm going to give huge disclaimers. But for example, a 506B plan would be going out and being able to raise money from up to 99 investors. Okay. And they are the ones that have to certify that they are accredited. Right. If you go for a larger fund where now you have to actually diligence the investors to make sure they are, in fact, accredited, that's a whole nother level with the sec. So again, I'm assuming that for your, you know, the first deal that our listeners are going to do, you know, it's probably going to be what we call friends and family, right? You're going to go to people who you know and you're going to ask them to invest alongside you because they trust you and you're going to show to them that you've got the experience and the right team to do this. But again, they're going to have to, you know, they're going to have to, you know, fill out the forms and the paperwork to certify that they are accredited. And again, my memory is a little bit rusty. So again, you're going to need, your attorney is going to need to confirm this very specific to what you're doing. But generally it's going to be someone who has a net worth of over a million dollars, has over $250,000 of salary. You know, they're going to check the box, they're going to say yes. Or, you know, there's special exemptions if you have someone who's already in the real estate business. So, you know, again, that's just part of it. If you are raising money, you know, I've gone into dozens and dozens of investments and it's a form, you know, if you ask the investor are you a credit or not, you know, if they've done this before, they know if they're not and they've got to ask, it might be all right. Maybe this is someone who, you know, if they're not used to investing.

I.

Think that should give you a little bit of pause. But again, follow your attorney's lead. You want to go out to people who are, you know, are professional investors. They have done this before. They understand, you know, a lot of the risks. You certainly would never want to take money from someone who, you know, does not have the wherewithal and the ability. And again, that's part of when you look at that private placement doc and everything that's in it, it's saying, you know, yes, there are inherent risks in what we're doing. You could lose all of your investment. I mean, those, the things that aren't just in the fine print. Like, it's really important, you know, to, to, to let people know that, that there are inherent risks here. And they have to be aware of them.

Yeah. When we talk about reaching out to investors, who you should be reaching out to, I'm curious if you can let us be a little bit of a fly on the wall, so to speak. I'd love to hear how you present these potential investments to investors. For example, are we talking about informal conversations? We're just calling up mom and dad or aunt saying, here's what I have. Are you interested? Are we showing more formal business plans? Does it vary? Talk us through how some of those conversations go.

Okay, so first of all, who to approach. And let's start with how to approach because very important that this is again, we're talking about a private placement here, right? So if you advertise and say, hey, I've got an incredible deal looking for investors, okay, there's probably, you just threw up, you know, dozens of red flags. You know, I read some of these things where it's like guaranteed returns, 12, 15%, like you're just waiting to get called by the SEC. And again, these are private placements for a reason, right? You are not able to advertise when you go out. And yes, I've done funds in the past and you can look at my bio, but I am not sitting here trying to sell you a fund or tell our listeners, hey, check this out, or hey, these are these incredible returns that you can get, right? This is very much about a one on one type of approach. And these have to be people who, you know, and have done, you know, have a business relationship with. Right? So again, if you don't know, 99 people on that level do not, you know, again, start small, think of your universe. And you know, look, I think sometimes LinkedIn is a great resource to just refresh your memory of, you know, who you've known over the years, who you've had, you know, have those types of relationships with. You know, look at your college network. Look at people who you went to school with. What are they doing now? Are they successful in business? Would they have interest? You know, you got to understand that, you know, most, you know, successful people out there who do have discretionary income, again, usually they've got their wealth advisor, they're in, you know, mutual funds, and they probably have very little exposure to real estate with maybe the exception of maybe the home, they have maybe a second home. But you know, besides REITs that oftentimes track along with the S&P 500, you know, to get direct exposure into real estate is a great opportunity, right? So, you know, you're reaching out sharing the news. Hey, you know, I'm, you know, I've been spending a lot of time focusing on my market. I know, Rachel, you're Miami based. Maybe you find kind of the hottest new neighborhood. You know, look, I've been watching this. This is happening. You know, XYZ company just opened up. We're bringing in a lot of tech. We got this whole crypto thing that's going on. I think there's a lot of excitement here. I've got a concept, a business plan. Okay, so that really, really important. That. Yes, we gotta make sure that the real estate deal makes sense. And we talked about that in the last episode. You know, why is this a good deal? Okay. And it might be the story of the sale, you know, the motivation of the seller, why you're able to, you know, tie this up at a below market price. You've got your comparable sales. You can demonstrate to me the real estate alone is a good opportunity, but without the business plan, you've got nothing. So is your plan. You're just buying it and it's cheap and we hope we can flip it for a higher price. Okay, now you're just speculating, right? And you're just hoping that yes, you got a good buy and that you can profit from that. But what I'm. And I get pitch deals all the time from sponsors. Hey, James, you want to invest with me? In fact, that's where the majority of my investing happens. I've got a full time job. I'm super busy when I come in as a sponsor and I'm looking to lead that. I'm typically doing that in a fun format. When I invest in specific deals, I am usually I have that sponsor, that operator, that general partner. And so oftentimes I become the lp, the limited partner. I am very interested in what is the business plan. So I want to know, hey, you got a great deal, but I also want to know what you plan to do with it. Right? And so that's really important is that you know the area. So it's very clear to me that you've studied, you know, what you're talking about. You can show me why this is a good opportunity, but then you also have to tell me what's the business plan. And, and then you have to be able to demonstrate to me that you can actually execute this business plan. Right? So, okay, you're telling me that, you know, these apartments haven't been touched for 20 years. You're telling me that these are large, oversized one bedrooms and you know, now You've got young professionals moving in. It's a shared market. You're going to create two bedrooms. Well, great. Tell me about the last, you know, 10 renovation projects they've done. And you might not have it. So that's why when you're thinking about your partnership, it's, oh, well, you know, actually I'm partnered with a veteran operator in the city who's done, you know, 20 other projects. They have their own construction in house, they do the renovations, they directly come with the subs. They're able to buy out the trades, you know, and get in at a very attractive basis. Okay, now you're starting to tell me. Okay, you've done the research, you've got the team. Operationally, I can see that you've done other projects in the past. I've seen you've done other projects. And then hopefully I'm not answering all the questions at once, but might as well go for it. The last piece is really the track record, right? So I want to see that you've done this before and I want to see the round trip. I want to see where you bought it. I want to say, what were you in for, what did you sell it for and what were the returns? Right now you might say, james, again, this is my first transaction. Okay, well that's why you need that partner to rely on to say, okay, well, this is new for me and I'm really excited. I've been spending a lot of time, but I've got this great veteran partner who's done 20 round trips. Look at some of the other deals. And yes, those deals have been in other neighborhoods, right? Established neighborhoods. But this established partner trusts my judgment and understands the business plan and can execute a couple miles nearby. And for me to get my mind around that, as an investor, I'm like, okay, I got it. This is a good team. This is a team that I can get behind.

Excellent. I have to ask a quick follow up question. When we talk about who you're reaching out to, I'm curious. I know sometimes you hear about crowdfunding as a way to raise funds. Is that something you often see first time investors doing? Never. I feel like we should touch on that since you often hear.

Yeah. So the short answer is no. If you are a. Sorry, sorry to burst your bubble, but no. If this is your first investment ever. To go out on crowdfunding is probably the absolute worst thing you could do. Why? Because when you're going to crowdfunding, okay, now we're no longer talking about a private Placement. Now this is a retail invest investment and again, I might be fuzzy with the letters, but the Reg D offering is for accredited investors. I believe a Reg A is open to all retail investors, meaning non accredited as well. The levels of accountability are so much higher, right, because now you're dealing with, you know, the everyday consumer, if you will, who's not a real estate professional, who's not an accredited investor, the bar is that much higher. So it's very important. And look, most of the crowdfunding platforms, they are very specific on making sure that their sponsor is vetted, right? They spend a lot of time and whether we're talking crowdstreet, Realty, Mogul, Yield, street, they'll tell you, look, we turn down a lot of opportunities unless if someone has, you know, really, you know, an institutional track record, right? Someone who has done, you know, has raised money before, has, has that resume. And I'm not saying there's not crowdfunding platforms out there who wouldn't give you a shot. But I'm just saying, you know, the risks are very high. I really think, you know, the way to do this is to start, you know, start small with that friends and family and then build that investor database. And then once you've done a half a dozen, a dozen deals, then if you want to supplement that capital raise with some crowdfunding, which I do believe is the way of the future, I think a lot of investors, they are moving, they feel comfortable with transacting online, but really not until you have that experience and track record. In my opinion, I think all of.

That is part of gaining the inside knowledge. It's also knowing what not to do, so what not to start with. But there's certainly many other things people you can ask, ways you can go about doing this. So thanks for that. So I'm curious when we look at this step as a process, so this comes after you found a property, and yet it comes before, you know, making an offer. So I'm curious on your thoughts about when you want to think about making that offer. You know, when does this process come to an end, so to speak? Talk us through do's and don'ts with that.

Wow, great question. And super important because you do have this kind of chicken and the egg situation where on one hand, okay, you found this incredible opportunity and if you haven't done this before, to try to scramble and find investors, you're not going to have time. So how do you start cultivating that investor database before you have those live opportunities? Okay, I think this is where your social media presence can come in. Super helpful, right? Because what you need to start demonstrating is showing that you're an expert, you know, whether it's. You start writing white papers on. Let's go back to that new neighborhood that you like outside Miami, right? If you start tracking the market and you start talking about why you like the area and you can show, you know, you're going to events there, you're going to community events, you're, you know, you're getting active there's. And you're showing people that you are really invested in that space and putting out even research, right. You know, as far as, you know, what are your findings, why are the opportunities. And now you start having that knowledge base where, okay, this person knows what they are speaking about and when they bring an opportunity, they've done the homework, they've got the connections, right? So I think that's, that's a part about building that network before you start having, you know, that, that, that actually live opportunity. But look, I mean, it also goes back to, you know, for that first deal, it might be just, you know, coming in for that sweat equity. And, you know, if you've got that, that veteran partner who's got their stable of investors or could, could frankly take it down with their own balance sheet, we see that happen. That, that's, you know, in the sophisticated institutional world, that, that's called a separate account, you know, where you'd actually be running, finding investments for a specific, specific person or entity. But yeah, I mean, I think having that backstop for the first one is critical. And then you don't have the pressure if you say, look, and if I can bring in a couple investors, start giving them the opportunity. But yeah, I would start with, again, really studying the area, putting out good content, which ultimately is going to go into your deck. Right. And I think we'll probably, maybe we'll talk about that next.

Yeah, that sounds great. Go right ahead. Let's jump in there.

Perfect. So the deck, which is really the, you know, the offering memorandum, not to be confused with the actual offering plan, which is the filing. But this is really where you're going to come in and you're going to make the case on the property. So it's going to include, you know, from a broker's perspective, what we do is a broker's opinion of value, right? What you will find in that is all the pertinent property information. And then you'll see our analysis. This is what we think this is worth our investment value using that capitalization approach we spoke about before, we're going to include comparable sales, we're going to include comparable rents to show what rents are happening in the area. So for the investor package, you know, you're taking this a step further because you are actually showing, you know, the sources and uses. And again, we're going to, don't worry, we're going to get to this in the next episode when we, when we speak to Derek and it's going to break this all out. But you're actually showing, you know, the investment, how this flows through, you know, how the profits will be, you know, would be shared. So you're going to have all that, but you're also going to have information on that business plan with supporting documentation on why you believe this plan is achievable. So if you're showing, let's say you're making that case of converting one bedrooms to two bedrooms, you better have comparables in there to show what those two bedroom rents are there. So you're going to show other projects that have achieved these rents and why, you know, why you think this is going to happen. You're going to probably put in information on what's going on in the area, what's the drivers, whether, you know, it's the new employer, population growth, all this stuff to make the case for why this area, why now, where you see that upside potential. And then, you know, the back of it is really also, you know, your experience and your, you know, your key terms. And so again, if your bio is, you know, is, you know, you're new to the business, you're going to be relying on that partner. So who is the team, right, that is part of this and that, that also, you know, having a well respected transactional attorney is super helpful. If you have your brokerage team already on board, that managing agent already on board identifying those parties so people know who the team are, you can leverage their experience as well. So that's the whole thing. I mean, look, don't go crazy with these decks. I mean, 15, 20 pages is more than enough, but it should be, you know, give someone enough of an understanding to know what, what they're looking at, the business plan and the team that's going to execute on it.

Okay, perfect. I'm curious as we think about looking towards that next step, if you could talk a little bit about typical timeframes for closing. I think it's important to know beforehand what we might expect and if that can vary as well.

Right. So again, this is really specific to the market. Right? Because the market dictates terms. Now, in New York City, in the most, arguably the most competitive market in the world, look, you can still conceivably get 60 to 90 days to close on a transaction. Okay, so once we hold our bids, you know, Rachel, great news, you won the bid. We're going to send out. Who's your attorney? You bet. You better be. Better be ready with that information. If you hesitate, I'm going to say, rachel, are we, we really doing this or what? So, okay, so you're ready to go. We're going to send out a deal memo which is going to say we're going to send contracts out that, that introduces the attorneys, sellers, seller's attorney issues that contract. Generally, there's only going to be about two or three weeks to negotiate that contract. In New York, again, very competitive market, you are doing your due diligence concurrently with that contract negotiation. So again, you are spending time, money at risk because you don't even know you have the deal yet. You know, and a lot of this depends on, you know, you've got some of these, you know, long time, you know, old time sellers who say, hey, I'm a handshake seller. And you know, this is your deal and you got time. And that, that can certainly happen. But you know, generally sellers are going to keep their options open and if a higher bid comes in during that two, three week process, you might get blown out of the water or the price might change in the contract and that can be a really tough pill to swallow. So, you know, but after, so you got that two, three weeks up front where at that point, you know, you should really be finalizing your deck. You should be out there, you know, start even talking to those anchor investors who's going to help you take this down and hopefully that partner who's going to help with that deposit as well. But once you sign that contract, it's generally going to be 60 to 90 days. And that's really more for the lender. The lender is the one, certainly a conventional lender. They've got to go get the property appraised, they've got to do their due diligence. They're going to want you to get an environmental report, they're going to want to get a property condition report. This stuff just takes time, right? And so, and sellers get that and they understand that generally if they give a buyer more time, they can get a higher price. Because if you say, if I went out of the gate and said we're selling this property and we will only accept deals with a 30 day close. Which look, if you really wanted to close on a property, we have done contract closings on the spot. So there's nothing magical about this closing process. I mean you could go into attorney's office and say, here's a deed, here's a cash exchange. The closing happens on the spot, which brokers love. That's like, you know, that's like Christmas, you know, instant gratification. Right? But if I did that, I'm knocking out like 90% of the buyers or you know, maybe half the buyers say look, I can pull the cash together but I'm not paying you 10 million bucks, I'm going to pay you 8. Because equity is more expensive than debt. Right? Debt. If I can go get financing. And even today, five year money's still historically low for a multi deal. It's probably still in the low 4% range. I mean here we are, April20, 23, it's 22 if you're, if you're listening to this in the future. But the point is that sellers should be willing to give some time for you to arrange that financing. So 60 and 90 days. Rachel, that is not a lot of time to be getting your equity circled and ready to go because you know, when you come up against that closing date, and again, this is where I've got to give my legal disclaimer, talk to your attorney, et cetera, et cetera. If there is a provision in that contract that you always, you know, this is like a buyer's worst nightmare. And again, market driven. But in New York you're going to see this time of the essence requirement. In many cases, time of the essence, that's a drop dead date. If you don't, if you don't show up with your money that day, it's over. Right. Now could the seller give you more time? Right. Because the reality is if you don't close, you know, are they going to go and you know your deposit is sitting in escrow. It's not like it's immediately turned over to them that day. Usually, you know, that's for another episode. You know, there's some back and forth there. So sometimes you can get a little extra time, but I would not count on it. Right. So you're hoping as a buyer to get, you know, in that 60 to 90 day close, non toe that means if you know you get a reasonable extension of 30 days, maybe a little more. So you know, in a, you know, a New York style sale, could you get three, four months at the End of the day, you might be able to, okay, now on the other side of the spectrum, you know, go into a secondary tertiary market. I mean, look there, especially for like, if it's a deal that requires some type of approvals, right? So especially for like development deals, forget about it. I mean, you could have something tied up for a year saying, okay, I'm only buying this, but only until I get approvals. And this deal is fully contingent on getting approvals to whatever it is commercial. Convert it from commercial to residential. Right. But it's market driven. Right. In New York, I don't, you know, we're selling the property as is where is. So if you want to convert the property to residential, you know, we got an old, you know, commercial loft building. You need to. I'm not going to represent that. You can do that. You need to have your zoning professionals, you need to figure that out. Right. But you're taking the risk and you're closing on this whether it happens or not. Whereas again, those kind of more suburban markets, you might be able to get that contingency that gives you a lot of time to close. And if so, you can use that time to your advantage, then you have more time to raise capital. So it really is market driven. So again, that's why. And there's trade offs, right? You might say, well, you know, James, why don't I just buy in secondary tertiary markets all the time? Well, look, when you're a seller and you're looking to get out of the investment, well, guess what? Now the shoe's on the other foot and you might be hanging around waiting for a year to sell the property. So, you know, New York is super competitive and tough to get into, but when it's time for you to turn around and sell, you're going to, of course, expect the same terms that you're not going to give, you know, a buyer a ton of time and leeway. Right. They got to buy in the same terms that you did.

I love this. I think having this knowledge beforehand is such a crucial part of this step. Because we've talked before about needing to be prepared, having that team of players ready so that all that all works with this as well. So you mentioned some of the risks in your last answer. We talked about non refundable risks as well. Are there any other risks that we should know about with this step? I ask it with the idea of just knowing what to avoid, what to do as well.

Sure. And sorry, I was just remembering, I forgot one more piece that's happening during the contract negotiations. And again, this is why you need a good attorney. You also are likely going to be doing your joint venture agreement, right? So, you know, you're, you're negotiating the purchase and sale agreement with the seller. But assuming you're doing this with a partner, your partner, and you need to have an agreement, right. So you are also going to be doing that, that purchase and sale. Sorry, you can tell that I'm definitely in New York City right now, but all good here. Sorry for the sirens. So, okay, we are talking about. Remind me, what was the next question?

Yeah, I was just curious on any other risks that we should go over. We've talked about some great ones, but I was wondering if there were any others.

Got it. Okay, perfect. So, you know, look, again, this is really market driven, but you know, when I talk about buying a property as is, where is. That is no representations, right. So you, the buyer in many cases, and you might say, james, why would I ever buy property if this is the case? But when you buy a property in some cases, okay, if we're talking New York multifamily, you could be liable for overcharges that happened before you even owned it. Right? Which sounds crazy, but that is why it is so important to vet what has happened because the owner. And again, there could be a whole nother show on rent regulation. And again, this is a national if not a global audience. But, you know, the point is that oftentimes, you know, the importance of doing the diligence and understanding what you can or cannot do with the property is critical because you know you're not going to get that seller representation. No seller is going to go on the hook and say, hey, I guarantee these rents are fair market and you can charge whatever you want and you can do this and you can do that construction. No one's going to give that to you. Okay. Now you might be able to get that contingent deal that, hey, I'm not going to do this until I know X, Y and Z can be done. Okay. And that could be a condition of the sale. But again, assuming in New York market you're buying this as is and you are taking that risk. So very important to understand, you know, the rents that have been collected, any prior liabilities, so violations on the property, right? So, you know, a typical way a New York contract is negotiated is you're taking over the violations, you're taking over the problems with the property. The certificate of occupancy is temporary. You know, you're buying it, you got to fix it, right? So you might get the seller to pay for any fines associated with it. So at least you don't go in with this obligation. Right. But you're going to have to fix those things moving forward. Right. So, you know, typically, you know, in a closing, what you are getting is free and clear title. Right? So that seller's going to have to say, you know, look, there's no liens against the property. The taxes are paid up to date, and that's why you also have title insurance. Right. So God forbid, I once bought a property and, you know, someone made a claim to it afterwards, and that's why you have title insurance. Right. But, you know, as far as what you can do with the property, environmental, like, what kind of environmental concerns, that's a whole nother discussion. I mean, that's why, again, it does go back to having the team and the right professionals. Because, you know, if we talked about all these things that could happen, no one would ever buy anything. Right. So there are inherent risks, and what you're trying to do is minimize them as much as possible. Right. So you know and understand what you're going into.

Exactly. As usual, you're the voice of experience in this area, and I appreciate that. One last question I want to ask before. I like to always ask, of course, about podcasts and other resources we can go to to learn more about the subject. I'm curious if there's anything else you want to cover regarding this important step first.

Well, I've got to give one final thought on. Let's get people excited again about why we're doing this. Right. So you might say, james, this is so fraught with risk. There's so many things that go wrong. You got all these documents that you have to file. And yes, there are inherent risks here, but there's also tremendous upside. And generally speaking, the properties that have the most issues are the ones that you can unlock the most value. Right. So again, if there are problems, if you're buying a building where, you know, there is, let's say, a holdover tenant, right, and that's one of your diligence items is are the tenants actually paying rent? You know, the seller might say, look, I'm done with this property. I've been in court with this tenant for, you know, a year. I'm done, I'm out. Great. Well, as long as you buy at the right price and you've underwritten, okay, well, it's going to be another six months before I ever see any income here. And yes, there's going to be Legal fees, but you should be getting a discount. Right. So any of these risks, it's okay to buy a deal that's not perfect. No deal is perfect. Right. Very few of them are. Right. But it should be priced in. Right. So the cap rate, whatever you're buying in today, it could be. All right, I get it. I'm only getting a 4% return, but I'm going to stabilize. I'm going to go for that higher return because I'm going to figure out things with that 10. And either I'm going to finish the eviction process, or maybe I'll even give them some money just to go away early so I get the keys back. But I'm going to go in there, I'm going to rent the store for double. Right. So that's part of this. Right. And so I think it's really understanding, you know, what are the issues, having that plan so you can fix them. And again, that's, you know, that is really the value add and where the opportunities are. So, you know, we've talked a lot about, you know, the risks and challenges, but there definitely needs to be a payoff as a result.

I completely agree. Right. And we've talked before about how this type of investment actually holds those exact opportunities. There's so many ways. And the key differentiator is really what you know and who you know. We've talked about some of those in the past episodes. We'll be talking about those up ahead as well. So I'm curious if you have a podcast we can go back and listen to or other resources that really highlight this topic we've been talking about.

Awesome. So, yeah, if you want to get pumped up and get excited about going out, doing deals, raising money, go back and listen to the episode with Jordan Vogel, who the title of the episode was Just Do It. And he talked about that whole point that things are never going to seem perfect. He said he's never bought a building where the next day he didn't regret it and think, you know, thought that he overpaid. Right. So you've just won the bid. Well, congratulations. You were the highest bidder. Right. So. But. But he, you know, on the note of capital raising, I mean, he built up this incredible database of investors to the point where he actually ended up graduating to a fund structure where investors gave him money to go out and buy a portfolio of properties, which is, you know, that is the dream for investors. Right. Is, you know, you graduated from doing the deal specific where you're raising money. Every time panicking that you're going to be able to get all the money together by closing, where suddenly you've got this fund with discretionary capital, where they call it discretion within a box. You're telling the fund what you're going to do. But. And he had an incredibly successful fund, and so very inspiring. And then if looking at kind of the institutional world, for those of you who are looking to really take it to the next level, Joel Breitkopf is a wizard at structuring deals and bringing in capital partners. So I'd listen to those episodes back to back, and I think, you know, you'll really see what the possibilities are here because, you know, to go back to one of the first things we said in this discussion, you know, you've got real estate, which is, you know, that is our product, that's what we're working with. But the actual structuring and the capital, that is when you put these things, those two things together is how this all happens and the capital raising in that aspect. And we're going to get into all those waterfalls and how to structure these deals. And we talked to Derek. But marrying that with great real estate, that is really, when you get this, exponential impact.

Wonderful. Yeah. I love the attitude of people like Jordan Vogel, too. It's such a great positive attitude and inspiring story. Like you said, this is perfect. I know. Next time we're going to be diving a bit more into some of the aspects of this topic. We'll be bringing in an expert who can help talk us through some of the details of this. And then we'll be moving on with the next step, which is closing the deal.

Love it. We're getting closer. We're getting there. People just hang with us. You're going to listen to this series. You're going to get the book. You're going to do great. So, Rachel, this has been awesome. Another episode. Thank you. This is your host again, James Nelson of the Insider's Edge to Real Estate Investing. I always have to hesitate a little bit. I'm still thinking real estate investing. Live from New York. Yes. It's still all the same thing. It's, you know, go back, listen to all the episodes, because this is all going to make you a better investor. But we have, we've got this name of the podcast because that's the name of the book. That's what we're doing. You're going to get the inside edge to real estate investing. So thank you, as always, for joining. And once again, if you have not connected with me, please do so at James Nelson NYC, Instagram, LinkedIn, Twitter. Check out james nelson.com that's where you can find the podcast, the show notes, the Key terms, the video series that goes along with. There's a lot of great stuff there. So thank you as always until joining. Until next week, thank you for listening.

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