Updated: Jan 9, 2021
Most people think they need to invest money to become a real estate investor. But in reality, there are many creative ways to own real estate. Whether you are a season investor, who either ran out of cash or want to diversify the risk, or if you want to get in the real estate game, but simply have no money to invest – this article will show you how to own real estate as a passive investor without investing cash.
A word of caution – nothing in life is free and there are no quick ways to become rich; if you don’t pay cash, you must bring something else to the table, whether it’s your time, connections or other equity that is tighed up on another deal.
Option #1 - Help a Syndicator Find a Deal (“Sweat Equity”)
If you have free time to dedicate to deal sourcing, then it could be a great way to own a property without paying cash for it. Many syndicators will be willing to give deal seekers equity (a percentage of the general partnership) if they find an off-market deal that will be sold to them. Finding off-market deals requires dedication, good interpersonal relationships with property owners and creativity. You’ll need to network with syndicators and understand their investment criteria pretty well (so you won’t waste your time bringing them deals that they’ll never buy), as well as the equity portion they are willing to give you. Next, as the deal finder, you’ll need to reach out to property owners, find those who are willing to sell and connect then to the syndicator. Finding off-market deals takes time, but it’s a great way to get equity without paying cash.
Option # 2 - Help a Syndicator Raise Capital
I know very few syndicators who don’t need help raising capital; as their investor pipeline increases, so does the size of the deals they can pursue. Helping syndicators provide investors relationship services is the most common way for new investors to get in the game. You reach out to family and friends (or network with investors) and go over the investment in details with them. In exchange for your hard work, you get a portion of the general partnership. Besides getting equity in a real estate deal, you’ll learn the business inside out. Many syndicators will guide you through the process and prepare you to answer any question that the other investors you recruit will. It’s a great way to learn about real estate investing in real time.
Option # 3 – Provide Syndicators Investing-Related Services
Another great way to receive equity is to help syndicators close the deal by providing different services; deal underwriting, legal services, accounting, etc. This is another way of bringing value to investors and receiving equity in return. Even if you are unsure of how you can bring value, simply ask the syndicator “how can I help?”. Keep an open mind and try to be creative, and you will be rewarded for bringing value.
Option # 4 – Signing on a Loan As a KP (Key Principal)
When it comes to commercial real estate, lenders require that the person who signs on the loan have a net worth equal to the loan amount and liquid assets that are enough to cover 12 months of loan payments. Net worth is basically a person’s property owned minus debt. Some syndicators have enough net worth to sign on the loans, but if they don’t – they partner with a Key Principle (“KP”) who signs on the loan in exchange for equity (that could be anywhere between 1%-10%). As a KP, make sure that the loan is non-recourse, which means that the only secured collateral is the property, and if the syndicator can’t pay the lender, then the lender will not be able to seize the KP’s own assets as collateral. However, KPs should know that there is usually a “bad boy guaranty” (also known as “recourse carve out guaranty”), where the KP can be held liable if the syndicator committed a bad act (such as fraud).
Option # 5 – Providing Syndicators With Proof of Funds (“POF”)
Many times, sellers require that buyers show proof of funds (“POF”) to indicate that they are serious about the deal and have enough money to at least pay the down payment for the mortgage or have liquid assets that are worth 10% of the purchase price. A POF is a piece of paper from the buyer’s CPA, financial advisor or the bank, confirming that the buyer has certain amount/assets (liquid assets are preferred). If a syndicator is having a hard time showing a POF, and this is the case for many syndicators who are just starting out, they will partner with someone who can show a POF to help them get the deal. Syndicators will reward you for providing a POF by giving you a piece of the equity.
This article covered only a handful of ways to become a PASSIVE real estate investor without paying “real” money. You can always find a way to bring value to the deal; whether it’s your sweat equity you bring to the table, in the form of hard work, connection and professional knowledge, or whether you are using your net worth to sign on the loan or provide a POF.
About the Author
Ellie is the founder of Blue Lake Capital LLC, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie". She started her career as a commercial real estate lawyer, leading real estate transactions for Israel’s largest development company. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She graduated from the MBA program at MIT Sloan School of Management and holds Masters in Law from Bar-Ilan University in Israel.