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How to Find Investors To Fund Your Real Estate Deals

by Michael Blank on January 7, 2014 · 24 comments

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How to Find Investors

I’ve been writing about buying apartment buildings with money from private individuals. In a response to my last article “The # 1 Secret to Raising Money to Invest in Apartment Buildings” another BiggerPockets member asked “how do you find local investors that are interested in discussing deals?”.

Great question, let’s talk about it!

For several years before getting involved with investing in apartment buildings, I was renovating houses, fixing them up and reselling them. To finance these “rehabs”, I raised the money from friends and family. The minimum investment was $25,000 and paid I them 12% to 15% simple interest, guaranteed by the house. The title companies took care of the promissory note and recording the deed. As I was eyeing commercial real estate, I polled my existing investors to see which ones were interested in buy-and-hold commercial real estate.

I was disappointed to find that only a few of my existing investors were interested. However, I found that people I knew were able to refer me to people who were interested.

The lesson here is not that you should start small first (with rehabbing houses, for example) before moving into commercial real estate. Rather, the lesson is that you should leverage your existing sphere of influence to achieve what you’re looking for – in this case, to raise money for apartment buildings or doing flips.

In short, the lesson (which was also confirmed in a recent Podcast with Mike Simmons, ) is to talk to everyone you know.

But how?

It’s surprising who your family, friends, neighbors and co-workers know. Never discount anyone – tell everyone you know what you want to do and you will be surprised at what will happen. If someone refers you to someone they know, always follow up. Even if that person will not invest, she may invest later or she may be able to refer you to someone else.

The conversation might go like this after you dispense with the small talk:

You: “I’m working on something new, maybe you can help.”

Susan: “Oh?”

You: “I’m looking to buy an apartment building in the metro area with a group of investors. The annual returns are expected to be around 13% and the minimum investment is $50,000. You wouldn’t happen to know anyone who might be interested, would you?”

Susan might say, “Well, I might be interested,” or she might refer you to someone, or she might say that she doesn’t know anyone.

If she is interested herself, schedule a meeting with her. If she knows someone, have her make an introduction and then follow up with that person. Make sure you keep Susan informed about the progress.

Your goal is to have as many in-person meetings with potential investors as possible.

Keep these tips in mind:

  • It’s important that when you invite someone to that first meeting that you say what the minimum investment amount is. Otherwise, if you’re looking for a minimum $50,000 and the person only has $10,000 to invest, you’re wasting everyone’s time. By the same token, if the other person accepts the meeting, then they’re implicitly saying that they are capable of and potentially interested in investing at that level.
  • Don’t “discriminate”. Often it’s impossible to tell who has money and who doesn’t. It’s amazing how much “little old ladies” have stashed away in their IRA accounts. Similarly amazing is how little money the flamboyant stock broker neighbor next door has to invest in anything besides his boat and second house.

Therefore, “EVERYONE” is the key: Talk to everyone, ask everyone for a referral, and follow up with everyone.

If you talk with everyone you know today, and follow up with referrals, you will be amazed at how much money you’ll be able to raise to invest in apartment buildings.

Next week I’ll talk about how to conduct your first meeting with a potential investor.

Let me hear from you below!

Thanks for reading,

Michael
Photo Credit: Phil Dokas

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{ 24 comments… read them below or add one }

Michael Sadler January 7, 2014 at 1:57 pm

Thanks Michael!

It speaks to the value of building relationships.

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Martin Cortez January 7, 2014 at 2:28 pm

I found my private investor by contacting a local real estate attorney who specialized in probate. They have a ton of contacts and can usually provide at least one interested party.

I sweetened the deal by offering to pay a $500 finders fee for every deal I closed on. For an attorney, I guess that’s enough for a haircut.

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Michael Blank January 9, 2014 at 6:16 am

This is great example of leveraging your existing sphere of influence and asking them for referrals!

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Lisa Phillips January 7, 2014 at 4:00 pm

Good article, thanks. I especially like the part when you emphasize that you can’t tell who is in play or not. Its so true.

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Gerald Harris January 7, 2014 at 8:40 pm

Great Read!
Many of the people you would never know would have a penny have some serious deep pockets. I have learned to never judge a book by its cover.

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Michael Blank January 9, 2014 at 6:18 am

This is especially true of people who have money in IRAs and 401k’s. And most of them don’t know they can use it to invest in your deals. Educating people about this is most certainly worthwhile.

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Jerry Dood January 7, 2014 at 9:34 pm

I’v been loving your posts about commercial apartment investing – that’s what I’m hoping to get into very soon. Gathering knowledge right now. So in simple terms the idea is to ideally use private money at say 12% for the down payment, and go to a bank for the rest…..probably at about 7% or so, right? So unless i’m doing the math wrong somewhere, for a typical $1M apartment, for example, at say 8% cap rate, your NOI is going to be about 80k. 30k of that NOI gets paid to the investors each year, leaving only 50k to pay what will be about 80k in loan payments to the bank. So you’re going to be losing about 30k a year.
1) How can you make a deal cash flow or even cover itself if you’re borrowing the entire down payment? Even at 10% cap rate it doesn’t work.
2) Doesn’t borrowing the down payment throw off being able to qualify for a bank loan for the rest?

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Michael Blank January 9, 2014 at 6:25 am

Hi Jerry – good questions, but hard to answer on the quick. I will do my best and use it for fodder for future articles!
First of all, it CAN work, because I’ve done it and so have others. Of course, the lower the cap rate, the harder it is to achieve high returns for yourself and your investors. You either accept those lower or returns, or you do deals with higher cap rates. I find that cap rates of 10% and higher work.

Typically, the money from the investors is not a loan with an interest rate. It’s equity in the strictest sense of the word, in that they are buying into the investment and get certain returns from it. Sometimes investors want a “preferred” return, which is similar to interest in a sense in that it is paid out first before distributions from profit.

So, while you could do a loan at 12% from the investors, this is typically not done because, as you point out, sometimes the cash flow doesn’t support it and effectively is equivalent to 100% financing, which is usually not recommended.

To answer the second question, yes, if you decide to borrow the downpayment with a loan, it may cause an issue with the bank (I’m not 100% sure, I haven’t tried it) because as far as the bank is concerned, you’ve now financed the property 100% which defeats their Loan to Value requirements.

In summary, therefore, down payment = equity NOT debt.

Hope that helps.

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Cindi January 9, 2014 at 1:04 pm

Even at a 10 cap, I don’t see how you’re promising people 13% returns, especially once you get 20%. Are you paying out a lower % than 13 each year, but counting the future returns through principal payback and property appreciation?

I’m also curious what you are doing to stay legal. I thought it was rather complicated to take money from outside investors legally.

Thanks

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Michael Blank January 9, 2014 at 3:18 pm

To answer the second question, “how to stay legal”, the short answer is to be working with an SEC attorney!

To answer the first question, I will work on a case study since it was asked about twice … please stay tuned!

Kevin Perk January 7, 2014 at 11:16 pm

Michael,

Nice post. You hit the nail on the head. Never discount anyone and just talk about what you do with friends and family. You will be amazed at who will want to invest and how much private investors will help your business.

Question. How are your structuring your deals with your private investors? It sounds like you are using more than one investor on a single deal. That can get a bit tricky. Care to expand on that?

Thanks for the great article. I hope it encourages folks to seek out private lenders,

Kevin

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Michael Blank January 9, 2014 at 6:26 am

Kevin – great question, let me put this on the list for a future article!

In general, yes, there are multiple investors. There are different ways to structure it, but I make sure I get at least 20% of the deal for putting it together and running everything.

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Pei Pei January 8, 2014 at 8:04 am

Great article, Michael! I look forward to your next article.
I’m from Malaysia (South East Asia), I invested in duplexes. When i told friend from my country, they are very interested to start. But what hold them back is they are not sure of the tax for non-resident, laws, estates, etc.
I really hope that I can learn from you how you split profits with your investors, legal rights and obligation, etc.

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Michael Blank January 9, 2014 at 6:28 am

Tax is definitely a concern. I had a potential investor who moved to Hong Kong and wanted to invest, and my CPA said that we would have to withhold taxes on this investor’s behalf and he would have to deal with it on his tax returns. My takeaway was that the whole thing was fairly complicated, and a confused mind says no! So we decided to pass on it. This doesn’t mean it can’t be done though!

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Gandalf January 9, 2014 at 10:35 am

Great article, Michael. I’m a real estate broker and I do a lot of fee-based management for property owners. I’m curious what it means in your bio that you ” began syndicating deals in 2010.” Thanks for the insight!

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Michael Blank January 9, 2014 at 12:34 pm

This means that I began buying stuff with investor’s money instead of using my own ! More specifically, I’m referring to taking on equity investors rather than borrowing money from investors (which is what I do on house flips). Hope that makes some sense -;)

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Kirby January 9, 2014 at 10:40 am

I kept reading through the comments waiting to see the SEC mentioned, but it never happened… So I’ll throw it into the mix.

I agree completely with the intent of the OP, but I would highly suggest that you look into SEC requirements with respect to substantial pre-existing business relationships and make sure they are clear on SEC regs before they start telling everyone they know specific details like expected return, etc.

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Michael Blank January 9, 2014 at 12:39 pm

This is a good point Kirby. I don’t recall a 100% re: the SEC regs on this (you should consult your SEC attorney), but if you solicit strangers with your investment you fall under a specific set of SEC rules. If you’ve had at least a few conversations with someone *not* about a specific investment, the you fall under a different (less stringent) set of SEC regs. I typically stay in the latter category (less requirements), which is why I start a conversation with people about investing with me in general, and only after a few conversations like that do I mention a specific investment.

Having said that, your SEC attorney can guide you re: specific SEC regs that actually allow you to advertise and solicit strangers. Can be done, just a few more hoops to jump through.

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Pete January 9, 2014 at 10:52 am

Michael, do you use past investments to show investors what you are trying to do when you set your meeting?

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Michael Blank January 9, 2014 at 12:35 pm

You can, if you have them. If you don’t have past deals, then you’re only option is to talk about a “sample” deal like in one of my previous articles. Clearly, actual deals are better. But if you don’t have them, a fictitious one that will substantially look like a real one is a good Plan B ….!

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Mike Nelson January 14, 2014 at 6:35 am

Great article!

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Anup Patel February 12, 2014 at 12:49 pm

Hi. I wanted to get your advise on raising money for some deals I have in gas station business for 18% CAP rates. Could you help?

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Frankie Woods September 10, 2014 at 3:05 am

Great article! Thanks for the info!

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Duncan Wilson September 12, 2014 at 6:40 am

Amazing facts post out with a commited mind to work on the path of the Reader. Execellent. Thanks.

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