Today’s REI Classroom Lesson

Nav Athwal goes over the importance of having a healthy balance of debt and equity for each deal.

REI Classroom Summary

Nav explains how using debt for your deals and provide high returns on your money but you can mitigate risk by having both debt and equity.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Nav: Hey, my name is Nav Athwal. I’m the Founder and CEO of RealtyShares, an online marketplace for real estate investing. I’m really excited to be here today in the REI Classroom to talk to you about whether you should use debt or equity capital for your next real estate project. An exciting topic that I’m looking forward to chatting with you about.

Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.

Nav: Most real estate projects include a combination of both debt and equity so it’s really not an either/or question, but typically how much of each do you want in your project. A typical real estate project, let’s take an apartment building, for example, will have usually 65 to 75% debt capital as part of the cap stack and 25 to 35% of equity capital.

One of the biggest benefits of real estate is the ability to put debt on real estate. What that means is you have less of your own money in the deal and you’re able to generate higher returns as a result. If you look a lever deal, meaning a deal with debt, and an unlevered deal, the same exact deal without debt, the returns both on the IRR and catch on cash perspective you’ll achieve with a levered deal is typically a lot higher than what you’d get on an equity-only deal.

So that’s one of the benefits of debt. If you can get down on your property, you definitely want to try and get that debt because it’ll have higher returns as a result. Now, you also want to be careful about how much leverage you put on the property. Some of the reasons a lot of companies and projects went bankrupt during the last recession was too much leverage. So getting leverage amounts that sometimes would exceed 80% or 85%, which could really impact the ability to meet that debt service coverage ratio in case the market cracks and NOI at the property level drops.

So you want to make sure you have leverage so you can generate higher returns, but not so much that if the NOI drops, in case there is a correction in the overall market that you’re no longer able to pay the interest payments and principal payments that are owed under the debt instrument. Again, I think you really need to consider a healthy balance of both debt and equity for your project when you’re looking to acquire a project.

Now, one thing I will say is a lot of times, the ability to get a loan quickly enough to buy a property may not be a reality. We saw in 2010, ’11, ’12 some properties were being funded or purchased in as little as 10, 15 days and one way to be competitive was to acquire the property in all cash so that you weren’t competing with offers that required financing. That is something sellers really like because it means you’ll be able to close more quickly and without any sort of financing contingency.

What you can always do if you do have a tight time frame in order to provide a competitive bid to a seller is you can always buy that property all cash and always refinance it after the acquisition and pull equity out. Again, I think to respond, it really depends on the specific deal but you do want to typically put both debt and equity both to maximize returns but also to mitigate risk in case there is a correction and there is too much leverage at the property level.

There are a lot of innovative ways in which you can fund your deal with both debt and equity capital. Our platform, RealtyShares, funds both. So you can come to RealtyShares and get both debt and equity capital for a single project or multiple projects. So there are very innovative ways to fund debt and equity capital outside of the traditional models like banks or friends and family.

Mike: HomeVestors, the “We Buy Ugly Houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit flipnerd.com/ugly to learn more.

Please note, the views and opinions as expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

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Nav Athwal is the Founder and CEO of RealtyShares. Athwal oversees company planning and strategy, legal, investor fundraising across the platform and deal activity. Nav started his career as an electrical engineer, before transitioning into real estate law. He worked as a Real Estate and Land Use Attorney at Farella Braun & Martel, LLP where he led some of the largest mixed-use, residential commercial and renewable energy real estate projects in California on behalf of clients such as Archstone, AvalonBay, FirstSolar, Equity Residential, Related Companies and SKS Investments.RealtyShares is an online marketplace for real estate investing through which Accredited US Investors can invest as little as $5,000 in residential and commercial real estate properties across the United States. To date, RealtyShares has successfully funded over 150 real estate deals to date. Athwal’s San Francisco Team has grown to 18 members in the last year and the company plans to have 35 employees by the end of 2015. In April, RealtyShares raised $10M in a venture round lead by Menlo Park-based Menlo Ventures with participation from General Catalyst Partners.Athwal is a UC Berkeley lecturer on real estate law, a real estate broker and a second-time entrepreneur. He has been featured on television networks such CNBC and Fox Business and regularly contributes to Forbes.