Problems Raising Money? What's Your TRUST Factor?

Many times I hear folks say they don’t know where to begin raising capital. To me it seems easy; you start with the contacts in your cell phone. There’s a lot of anxious money in the market right now, especially with retirement money. Why is money anxious you might ask? According to the most recent statistics, the average amount in an IRA account is $54,863, and only about 3% of accounts are self-directed*. I’ve always said the best way to raise money is to teach it, so it could be very helpful (and lucrative) to show your family and friends how they can set up self-directed IRA accounts so they can lend private money to an investor (like yourself) for a Real Estate deal, note purchase, etc. Once they go self-directed they can invest in, for example, a 1st mortgage on a rehab deal for 6 to 12 months (like a renovation loan that’s secured to the property, 12-18% range) and they get paid off when it sells or you refinance. Now this is just with one deal, imagine when you work your way up to something bigger, with about just 10 of these average IRA contacts, you could potentially have half a million for deals!  

We all know that sure it sounds easy, but introducing the idea of borrowing money to a personal friend or family member may come off as a bit of a shock. Hell, even the idea of putting their money into a self-directed IRA could be a shock. The real reason people have trouble raising capital is what I call the “Trust Factor.” It’s really about whether the folks you’re trying to raise money from trust you and the particular deal you’re pitching to them. What kind of return will they get? How much risk are they really taking? After all they are family and friends. It’s their hard earned money or their retirement money on the line. You have to treat it like it’s your own. You have to treat your lenders like you’d want to be treated and you especially need to keep them informed on the project. Not only do they have to trust you, but they also need to trust your project and your experience and ability to perform like you say you will.

No matter how great you are at pitching the project, you will also have to be just as great at defending it. There will be objections, but fortunately for you I’ve heard them all and have done my best to come up with answers to handle them. The basic objections apply to any investment but I’ll stick to using hard Real Estate as my example because it’s tangible and it’s something most of us are familiar with. Number one is just plain risk. “But isn’t that risky?” If I had a nickel for every time I heard that from a relative or old friend, I probably wouldn’t have to invest! So how do you mitigate the risk for your prospective lender? Make sure they know the property; show it to them, the first time around you may not want to invest in a "war zone" per say because you want them to feel like they wouldn’t mind taking the property back if the deal went sour. I also always draw up a note, a mortgage, and a deed in lieu. I personally only lend to an LLC and I do all the paperwork through a title company or attorney – so it’s a lot more professional, you can also personally sign to make the person lending you money see you’re serious. I get named insured, I get an official appraisal, I check the title and I show all of this due diligence to the person lending me the money. It may be hard on the first deal, but once you’re done the first the second and third’s a breeze since you can show a track record of deals done in the past; I even let them talk to other people who have lent me money.

The second biggest objection is “What if you can’t sell it?” or “What if you can’t refinance?” That response is simple, you can build in penalties if you don’t get the money to them in time or just make sure the note is the sufficient amount of time for the lender to be happy and the job to get done. You want A CLEAR DEFINED EXIT. The idea is you want them to lend you money time and again, so it’s all about building a relationship so both parties come out winners. You want that one lender to tell their friend that you’ve made them money and hopefully they TRUST them enough so they do it too, and so on and so forth. Knowledge of your project is absolutely necessary to raise money, but even more than that; it is trust that will get you private money for any project you’re working on.

*http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4640