The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE!
Last week, I was in Houston to check out the 552-unit and 104-unit buildings that I own with some JV partners. I also attended a mastermind with intermediate to advanced residential investors who are new to multifamily, but have extensive experience flipping and wholesale homes and oversee 200-500 units.
One thing that I noticed, as they grow their businesses and start to do larger deals, many of these guys are now trying to sponsor loans–and their questions inspired today’s episode.
If you’re looking to have a better understanding of the differences between loan and deal sponsorships, I hope you’ll get a ton of value from this episode. You’ll learn what a deal and loan sponsor’s roles and responsibilities are, you’ll see how these roles play out in my own deals, and how to find someone with the key experience to make your dream deal a reality.
Key Takeaways with Josh Cantwell
- Why the deal sponsor is the person who finds the deal and takes the lead on putting together the dream team.
- How the loan sponsor gets qualified for the loan needed to do the deal–and how much liquid capital they’ll need to make it happen.
- How I became the deal and loan sponsor on a property I’m buying right now.
- Why it’s so important to build out your network to find loan sponsors.
- How to find key people with the experience you need.
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Josh Cantwell: So, hey there, welcome back to Accelerated Investor. Listen, I wanted to jump on and just talk to you about loan sponsorship and deal sponsorship. I was at my mastermind last week. We were down in Houston. I was down at a 552-unit that I own with some JV partners and another 104-unit that I own with JV partners.
And we had a group of about 50 of our mastermind members down there. These are guys who are intermediate to advanced residential investors and kind of new to intermediate multifamily investors. Some guys that have 200, 300, 500 units, flipped hundreds of houses, wholesaled hundreds of houses.
And anyway, they came up with a question about deal sponsorship and loan sponsorship because they’re growing their business and they’re starting to do larger deals and they’re wondering how to sponsor loans. And so, the question came up about sponsorship. And there’s really two types of sponsorship, and this is what I want to tell you about real quick, is there’s a deal sponsor and then there’s a loan sponsor.
The deal sponsor is really the person that found the deal, the person who is aggregating the team together, putting together kind of the dream team to execute the deal, putting together the loan sponsor, the property manager, the equity, the capital improvements, the insurance, the key personnel. The deal sponsor is the guy or gal who found the deal and kind of takes the lead on aggregating the dream team together.
Now within that dream team, there’s a loan sponsor. The loan sponsor is the person who has a large enough balance sheet and large enough liquidity to get qualified for the loan. Normally, when a lender, whether it’s a bank loan, whether it’s a bridge loan, whether it’s Fannie or Freddie, they’re looking at the loan sponsor really under two main categories. One, they have to have a net worth equal to the loan amount or greater, and they have to have liquidity equal to roughly 10% of the loan amount or greater.
So, we’re buying a property right now. The purchase price is $16.3 million. We’re going to put $2.5 million of improvements into it. We’ll be all into it for about $19.5 million. We’re getting a loan from a bank for $15 million, and the bank is going to advance $12.225 million at the closing and then another $2.5 million of capital improvements. So, the bank looks at us and says, okay, you’re not only the deal sponsor because we found it, we offered on it, we got our LOI approved. We’re putting together the debt, the equity, the capital improvements, the property manager, the insurance. We underwrote the deals. So, we’re the deal sponsor, but we’re also the loan sponsor. They’re two different things.
The loan sponsor has to have a net worth equal to the loan amount, the loan amount being $15 million. So, we have a net worth large enough to sponsor that loan. And then we have to have liquidity of 10% of $15 million, which is $1.5 million. We have to have liquidity of $1.5 million, which we have, so we can sponsor our own loans.
And so, the question came up about, okay, well, how do I find a loan sponsor? And again, the answer is networking. There are plenty of guys out there, highly compensated, guys have big balance sheets, big incomes like us, and they can sponsor loans, could be a doctor, could be somebody that sold waste management company or an e-commerce company. Actually, in one of the deals I did, the one down in Houston, the main loan sponsor was a family office who actually sold a waste management company. I believe they exited for $100 million and they had a large enough net worth to sponsor a $70 million loan. In all transparency, like I didn’t sponsor that loan, somebody else did.
So, then the question came up from our mastermind group and said, well, okay, if you have a $15 million net worth and $1.5 million liquid, can you just sponsor that first loan? Or can you then sponsor multiple loans? And the answer is you can sponsor multiple loans. Each loan is looked at in its own silo, on its own. So, if I buy a property today and the loan amount $15 million and the liquidity requirement is $1.5 million, check the box, check the box, I closed that deal today, 30 days from now, 90 days from now, six months from now, I could sponsor another loan using my balance sheet and liquidity.
And liquidity comes in the form of anything that can be turned into cash quickly. Stocks, bonds, mutual funds, crypto, stock accounts, and even retirement accounts if they’re in the market. And those retirement accounts could be liquidated and turned into cash. You might have a penalty to pay, you might have taxes to pay. So, if you have a retirement account with a million bucks in it, the bank, depending on the bank, they might say, well, we’re going to use 70% of that number as liquid cash because if you needed to get the liquidity, you could get it, but you’d have to pay a penalty, you’d have to pay taxes so we’re going to use 70%. So, they’re going to use $700,000 towards your liquidity requirement.
The next question that came up from my mastermind member is, well, listen, how do we find a key person that has the experience? So, let’s say we find the deal. So, one of my mastermind students finds a deal. John, Peggy, Helen, Marcos, Paul, any one of these guys in the mastermind finds a deal, and let’s say they’re the deal sponsor. They found the deal. They’re going to aggregate the team together, create their dream team. Let’s say they find a loan sponsor, but maybe they don’t have a $15 million net worth and $1.5 million liquid so they’re going to find a loan sponsor. It could be me, could be somebody else that’s going to sponsor the loan.
Then the bank might also say, well, we need someone with experience, and that’s called a KP or a key person, key personnel that has the experience that would kind of sign on the deal and bring their experience to the deal. And so, you have this kind of puzzle with six or seven different parts, and the deal sponsor could be one person, the loan sponsor could be someone else, the KP with the experience could be someone else. You could have somebody raising equity or multiple people raising equity. You could have somebody that finds deals. You can have somebody else that underwrites, somebody else that finds the insurance. These are all the different kind of actions and requirements to pull the deal together.
But you could absolutely be a deal sponsor and just aggregate other people. You don’t have to have a big net worth, you don’t have to be able to demonstrate experience or be a loan sponsor. You could just be a deal sponsor and bring in everybody else. And so, someone who is maybe intermediate to advanced residential investor, but who’s good at networking, good at finding deals, could start their commercial apartment investing as a deal sponsor, but outsource the loan sponsorship to somebody else, maybe give up 20% or 25% of the deal to someone else for loan sponsorship. Maybe you bring in a key person that has the experience, and that person maybe not even really involved in the day-to-day management, but they just hang their experience. So, the lender sees that there is experience in the room, there’s experience in the group, and maybe they get 5% of the deal. And then you’ve got the equity investors and they get a piece of the deal and they get the people that raise the capital. They’re part of the joint venture. They’re doing the underwriting, they get a piece of the deal.
But I wanted to answer this question about deal sponsorship, loan sponsorship, and key people or key personnel because this came up at my mastermind. So, again, deal sponsor finds the deal and puts the team together. Loan sponsor, equal net worth equal to the loan amount plus liquidity of 10%. And then a key person, key personnel, brings their experience to the room. So, it’s very feasible that you could get involved in a deal as a deal sponsor and have nothing else, no experience, no balance sheet, no liquidity, and just putting the team together and still get a piece of the pie for you.
Josh Cantwell: Well, I hope you enjoyed that quick discussion around deal sponsorship, loan sponsorship, and key personnel. If you did, hey, leave us a five-star review. We always love it. We’re so grateful when people share our episodes, when they share this on social media, they listen to an episode, share it to their Facebook page, their LinkedIn page, their Instagram, get the word out. And of course, leave us a rating and review. let us know how we did.
And of course, if you want to be a deal sponsor, but maybe you don’t have a loan sponsor, don’t have key personnel, you probably should consider jumping into our mastermind group and applying for that at JoshCantwellCoaching.com. There are people in my mastermind that have significant net worth that can sponsor loans. There are people in my mastermind who are limited partners that invest equity in deals. There are lots of people in my mastermind who are deal sponsors and finding deals and putting the team together. There are lots of people in my mastermind who are key personnel, who have apartment experience, have done lots of deals.
And so, if you don’t have those pieces and you’re kind of looking to kind of round out your team, sometimes you’ve got to buy your way in or apply and buy your way in, and doing that through the mastermind will work. It’s working for other people. Matter of fact, I just was reading a text message from one of my students, Bruce and Cass, and they were just texting me earlier today and they said, “Hey, we’re putting together a handful of people in the mastermind group. John, Peggy discussed raising money. If we split the deal, 55% to this person, 45% to that person, how much money should the acquisition fee be? Who does the decision-making? We’re having a Zoom call with Robert, Jesse, Helen, Rick, Dr. George, etc., to discuss the deal.”
So, this is a real deal. It’s a $4.5 million deal that they are working on together and they’re aggregating their team to put that deal together. And it’s all happening inside of the mastermind group. It’s pretty exciting. So, if you enjoyed this episode, if you did, let us know, and we’ll talk to you next time. Take care.