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SHOW NOTES FOR EPISODE 075 – FINDING A SPONSOR FOR YOUR DEALS WITH JOE FAIRLESS
As you grow your real estate portfolio and get into bigger and bigger deals, finding a sponsor may be a necessary requirement to get funded, especially if you don’t have the required net worth and liquidity to meet lender qualifications. In this episode, Joe Fairless, the host of The Best Real Estate Investing Advice Ever podcast, discusses the role of sponsors and how to go about finding one.
What You Will Learn
- The definition of sponsorship as it pertains to real estate investing
- How a sponsor can get you into deals for which you might not normally qualify
- Two things to mention to a sponsor to get them interested in your deal
- Creative ways to find a sponsor
- What motivates sponsors to get behind your deal?
- Do you get the sponsor before you have a deal?
About Our Guest
Joe Fairless
This is Joe’s second appearance on the Old Dawg’s REI Network. You can find his first interview in our blog archives under episode #001, entitled “How I Grew My Real Estate Business to $28 Million in Three Years.”
Joe Fairless is Principal at Fairless Investing and Host of the extremely popular podcast “BEST REAL ESTATE INVESTING ADVICE EVER.” He is also the author of “The Best Real Estate Investing Advice Ever – Volume 1.” He started buying multifamily properties in 2013 and now controls over $101,000,000 worth of real estate in the U.S. He currently lives in Cincinnati and has been investing in real estate since 2008. Prior to that, he was the youngest vice president at an award-winning advertising agency in New York City. He also currently consults other investors on multifamily investing. As host of the popular show Best Real Estate Investing Advice Ever Show, which is the world’s longest running DAILY REAL ESTATE PODCAST he has interviewed guests such as Barbara Corcoran from the popular show Shark Tank and Robert Kiyosaki, author of the leading real estate investor book RICH DAD POOR DAD. He is a strong advocate of GIVING BACK and serves on the Alumni Advisory Board for Texas Tech University and the Board of Directors for Junior Achievement in Cincinnati.
Definition of a Sponsor as it Pertains to Real Estate Investing
- A sponsor is a person who has the network and liquidity and signs on the loan documents so you can get approved for the financing for the commercial real estate transaction.
- If you are just starting out and you don’t have the net worth and liquidity, a sponsor can be the only way a bank will approve the loan for your first large investment.
The First Deal Where Joe Needed a Sponsor
- Found a really good deal
- 250-unit apartment
- Saw there was an opportunity to add value
- A stabilized property
- Everything checked out
- He had only purchased one multifamily property before that
- His business partner had never purchased a multifamily property on his own. But in hos $450 million dollars in apartment communities and asset management and disposition of some of them
- Neither had net worth nor liquidity
- Partnered with a property management company in the area that his business partner had a relationship with
- The Structure: Joe and his partner brought 70% of equity but the PM company got 50% ownership. They split 50/50 on the proceeds, i.e. acquisition fees, asset management, and profit on the deal
- Part of the deal is that the PM company would manage the apartment after it was purchased so that had significant control on the success of the deal
- The loan was a non-recourse loan which meant that the partners’ are not personally guaranteeing the loan. There were, however, some “Bad Boy” carve outs or clauses in the loan paperwork that protect the borrower from “gross negligence” or “fraud” the loan can become a recourse loan.
- Non-recourse loans are more appealing to potential sponsors
Sponsorship in Other Deals
- Different Structure on Another Asset Joe Has:
- For his net worth and liquidity and the guarantee on the loan
- The Sponsor didn’t invest in the deal
- Gets 10% ownership
- Guarantees .25% of the loan and is paid to him on an annual basis, for example, on a $12 million loan balance, would be $30,000 annually that he receives
- This is what Joe eventually aspires to, down the road, to become a truly passive investor
- His business partner had the sponsor contact
- Joe says in 3 years they won’t need sponsors
How to Find High Net Worth Individuals
- Go where they hang out
- Volunteer for a cause you believe in, spend a Saturday, get on the Board
- On the board you will meet people that can sponsor your deals
- Joe has a video for old daw listeners on this subject – see below
Multiple Sponsors on Deals
- Sponsors want to know that you have “skin in the game” and expect to see you invest something
Why Would Someone Want to be a Sponsor?
- Get ownership and passive cash flow by just buy signing a few papers, getting approved for a loan
- Only check in quarterly, in most cases
Two Things That Will Get Your Potential Sponsor Interested in the Deal
- The loan guarantee fee (example above mentions .25%) paid out annually
- And the percentage ownership of the deal
Chicken and the Egg Question: Do you get the sponsor before or after the deal?
- Get the sponsor before you get the deal
- Clearly define what you are looking for before you talk to potential sponsors, for example:
- I’m looking for deals around $10-12 million
- The loan will be around $10 million
- I’m looking for a guarantor because I don’t qualify yet
- This is what my lender or mortgage broker says I will need for a net worth and liquidity standpoint – Sponsor will have to fill-out paperwork
- I am offering .25% on the loan balance plus a percentage of equity ownership
- Is this something you would be interested in participating with me on?
How to Contact Joe
The Freebies
- Video on how to attract high net worth individuals
- Apartment resources guide
- Just e-mail Joe and ask
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Episode Sponsor: Meno Studio – menostudio777@gmail.com
