Raising Capital for Your Investments: What Are Private Lenders Looking For?

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Although I’ve been raising private money for over 10 years, I recently felt the need to check out what some other folks were doing in regards to raising capital for real estate deals. Sometimes, I think we all need to get back to the basics, whether that’s to verify that what we’re doing is correct or to see if it’s the best of what we can be doing. So, I signed up for Leonard Rosen’s “Pitbull Hard Money Conference” in Fort Lauderdale, Florida. Besides, it’s February in the Northeast, and we’ve had some pretty crappy weather. What a great excuse to get out of town.

For me, the conference was just what the doctor ordered.  Set aside the fact that my wife and I got to enjoy a great venue on the beach, there was excellent networking, time to reconnect with old friends, and, most importantly, some really good content.  Many of the folks in attendance, besides me, were already operating successful funds.  One guy in particular, who appeared to be around 30 years old, had already raised over $100 million in the last four years.  And, many more folks were ready to take the next steps to starting their own funds.

The information was so valuable, and it really centered on how to give investors exactly what they’re looking for. And honestly, that is the key. As Zig Ziglar said, “you can have everything in life you want if you will just help enough other people get what they want.”

The concepts are the same, whether you’re raising money for one property, or 100 houses. If you learn how others are raising private money and apply some of those ideas to your own business, it can make funding so much easier. Since I was able to grab many of these ideas and think about them in the context of my Note Business, I would like to pass them along for any of you to utilize as well.

Here are a few things I learned about what investors are looking for today…

Related: How to Find Investors To Fund Your Real Estate Deals

Security is more important than yield, although investors want both.

Although there are two types of money, regular and self-directed retirement money, people just need a safe, fair return. They enjoy income and monthly cash flow, but if they can get a conservative investment that’s backed by real estate, they’re set.

Showing investors the security that a fund offers largely has to do with the architecture of that fund. This includes everything from have the proper legal docs and filings in place and showing that to investors, to providing them with a fund review that paints a clear picture of the fund’s characteristics. Investors may want to see that you have a professional board of advisors, for example. This could consist of your banker, title person, appraiser, attorney, accountant, REO agent, etc. Rosen also mentioned that investors like to see a valid track record and management with actual skin in the game. Audited financials and transparency to the funds activities goes a long way too. In essence, investors may feel more comfortable when they can invest with an organized and professional enterprise.

Investors invest in the relationship, not the investment.

Of course the type of investment, itself, is very important. It is correct that you need to have a viable investment or no one in their right mind is going to invest with you. That being said, when there are thousands of people or companies doing the same type of business, why would someone invest with you or with your company?  It really comes down to trust and integrity, as well as the reputation of the company and the management team.

One of the best ways to build a relationship and show your trustworthiness is through proper communication. For example, as an investor, would you feel more comfortable investing with someone long-term if they communicate with you regarding their business goals and any new strategy changes? Probably, right? Proper communication can be accomplished in several ways. It could be anything from providing financials, investor packages, and monthly statements, to making phone calls to investors about the fund’s newest strategies or utilizing a website to validate what the fund is all about. Investor’s like to know the management’s background and experience level. They may also like to hear testimonials and positive referrals coming from others, as a form of validation. Maybe they want to be reminded of the benefits of investing in this particular fund, whether it’s your conservative underwriting or the quality of the collateral that accompanies the consistent yield offered by your fund. It never hurts to give an investor a call, invite him/her to lunch, or host investor events. If they’re consistently being paid, just keeping them informed of new, upcoming opportunities is reason enough to stay top of mind when the investor is thinking about his/her portfolio.

Even if you’re only raising money for one deal, building a relationship with the investor means that you can go back to them with future deals.

Related: Capital Investors: How to Reduce Risk Investing in Syndicates and Funds

Investors want access to deals they couldn’t normally get.

This statement is so true. Many people just don’t have the skills, or time required, to go find good deals to invest in. Many folks just don’t have experience raising capital or being the bank, either.  Or, some people just don’t have an interest in finding or managing real estate deals. That being said, they might want to participate in a safe, high yield investment backed by real estate. If you’re running a fund, you would be giving investors the opportunity to participate in commercial and residential investing and finance.

To show investors that you would have this opportunity or access, you can provide them with sample deals from your past portfolio, such as deals you’ve partnered on or deals you’ve sold to other investors. Then, you can show investors the opportunity that exists with similar deals in the market.  Or, by giving the investors a clear picture of how the fund operates and the experience level of fund manager(s), or board of advisors, they may realize that it’s a lucrative opportunity to invest with people well-versed in the business.

As Leonard Rosen said, “90% of raising capital is showing up.” Basically, do you do what you say you’re going to do? If you can clearly demonstrate what you’ve done in the past and what you’re successfully doing today, then it’s much easier for investors to buy into your plans for the future.

Now, all you have to do to get more investors is to become more well-known in the community…the rest is easy.

So, I’m curious, what are some of you on BiggerPockets doing in regards to raising capital for real estate deals? Maybe you have some fresh ideas to share. Or, have any of you taken similar ideas and adapted them to fit your own plans or your business model?

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About Author

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

20 Comments

  1. dell schlabach on

    Good information, I like the comment… 90% is showing up, and do what you say you are going to do. Seemingly simple but powerful in giving you credibility and building trust.

    Communicating going to lunch with my investors ” private lenders” in my case, has been one key to rasing an ever increasing amount of money, from the lenders as they acquire more, as well as making them comfortable in referring their friends.

    We are still playimg a relatively small game compared to what you are doing, yet the same principles apply.

    Today my challenge is no longer raising money to grow, in large part to following some of the principles you mentioned, today our challenge is being able to rehab houses fast enough.

    Well written article

    Thanks

    • Dave Van Horn

      Hi Dell,
      You’re right. When I first started in the notes business, I thought all we needed was the money, but I quickly realized that capital was just part of it. For us, it’s basically three pillars: capital, sources of product, and scalability; we pretty consistently shift our focus to whichever of these three phases needs adjustment. It sounds like you’re in the scalability phase. In this phase, we continually revisit the question: how much can we do if we had an unlimited amount of capital? This helps us build out the necessary manpower and other aspects of our business to handle the product load.
      I agree that going to lunch with investors is great for relationship building as well. Great comment, thanks for sharing!
      Dave

  2. Excellent article…. The key to raising investment capital is allowing your investor to make a personal connection with you. People normally do business with people they like and trust.
    I remember something I was told many years ago…. People will forget what you said to them, People will forget what you did for them, But people will Never forget how you made them feel. Investors need and want to feel good about the relationship. Getting investors to deploy capital is much more than the numbers on paper.
    Leonard Rosen

    • Dave Van Horn

      Hi Leonard, thanks for chiming in! The program validated a lot of what we currently do, but it also opened my eyes to some things we can do better, so thank you for that. And, you’re right. People love to do business with a friend, and building a relationship based on trust is key.
      Best,
      Dave

  3. This article is great, but what about Newbies, how can they get private money since they have no previous deals to show the lender? Everybody was a Newbie once (I thinK).

    • Dave Van Horn

      Hi Lee, thanks for the positive feedback!
      When you’re new, there is the option I mentioned in the article, which is to partner with someone who’s already doing deals until you have more experience. But, I’m glad you asked this, because there are a few other options which come to mind.

      Another option is to go off of a mentor’s track record. For example, when I started notes in 2007, we went off of the statistics from our note seller to us, since we were a brand new note fund. So, you could communicate your mentor’s track record and show lenders that this person, or company, is on your team, helping you get started, and/or walking through the deals with you.

      This is similar to the idea of putting together a board of advisors (whether that’s your real estate attorney, accountant, etc.) and showing the track record that those individuals have, or the experience they have, regarding private money.
      As Leonard Rosen was teaching, it comes back to the “architecture” of your fund. Or, for someone who’s new, the architecture of the deal. Someone who’s new can start to put a team together and start to put a portfolio together. They can also focus on showing the lender/investor that it’s safe, that the investment is backed by real estate.

      When you’re just getting started, another option may be to share some upside of the deal with the lender, or offer better terms, rates, etc. to make up for the minimal track record.

      To learn more about raising private money or to gain more experience in it, you can raise money for someone else, raise money for charity, or network with people, who have already done private money deals. You can also learn about private money by running one of your deals by a hard money lender, since most private money lenders have similar criteria to most hard money lenders. They may be a little less expensive or less strict, but the basics are the same.

      I hope this info helps! Please feel free to ask if you have any more questions.
      Best,
      Dave

  4. Great article Dave!

    I have a question for you about something I’ve heard in the past and have been thinking about recently.

    I’ve heard from multiple people the idea of under promising or projecting and over delivering as a way of really making your investors happy. Taking this into account, when you structure your deals how do you go about building this in?

    For example, if you have a project that you are projecting an IRR of say 20% on, do you tell that to your investors right off the bat or do you lower that number to give yourself a chance to over perform on the return they thought they would get?

    • Dave Van Horn

      Hi Nick,
      Thanks for the positive feedback! Although there are many ways to over-deliver, and I prefer honesty with the investor, I do agree with you on a few aspects. If you show people a return that’s too high, they may see it as unfeasible or that it’s a risky investment. So, maybe lowering the rates, in that case, would help you raise more money.
      We pay a flat return, so we address this a little differently. We make sure to stay in communication with our investors and never miss a payment (we’ve never been late). For us, being consistent has been one of the biggest ways that we’ve built trust with our investors. Another way is by putting the investors first in an effort to build and maintain a long-term relationship. For example, if we were to pay someone off early, we would still pay a minimum amount of interest to make sure the investment was worth their while (for us dependable money is more important than cheap money).
      I hope this info helps!
      Dave

  5. Great article. Do you have a resource/article/book you could recommend in regards to the more intricate details of raising private funds? Specifically working through all the steps from addressing the investor’s concerns, answering all questions, and doing the paperwork necessary to back their funds with real estate. I have the basic understanding but wouldn’t be able to really complete the whole process

    Thanks in advance
    -Nick

  6. Hello,

    We are in the financing phase of a3 bedroom town home in Decatur Georgia.

    the lenders are asking for 25 percent down on a 5 yr ARM which comes to $20,000. the other option is 20 percent down on a 30 yr fixed which comes to $16,000. the advantage of the 5 yr ARM is the monthly payments are only $260 verses 20 percent down option has a monthly payment of $300. I am budgeted for only $17000. I’m not sure what strategy is best and I would love to know some expert advice from others thank you.

    • Dave Van Horn

      Hi Aliasgar, thanks for reaching out!

      Although I am unsure as to how a budgeted $17,000 would afford a $20,000 down payment, there are two main questions I consider when I’m looking at an ARM:

      1. What are my goals for the property? For example, how long am I keeping it? Am I renovating it? Am I raising rents? Do I plan to refinance or sell?

      2. What kind of impact will the ARM have on me in the future when it adjusts? At the highest possible rate, based on the cap on the ARM, would you still cash-flow?

      For example, I had a 5 yr. ARM on a 6 unit building, which I renovated to a 3 unit building. I knew that I would refinance when I finished the renovations, so I knew that I wouldn’t be affected by adjusted rates.

      Thanks for your question. I hope this helps!
      Dave

  7. Hi Dave,
    I have been investing in real estate for about 2 years now, but now I am too the point where in order to move on, I would better benefit by using private funding. I have a few private lenders willing to work with me, but since I haven’t done that yet, I won’t to make sure that I secure their investment properly. Do you always have to use a Real Estate Attorney for this, or are there some general contracts/documents located somewhere that you can use when working with private lenders? We want to work together without having to form a entity partnership if possible. Appreciate any help/guidance. Thanks!

  8. Hi Dave,

    I have been investing in real estate for about 2 years now, but now I am to the point where in order to move on, it would better benefit my needs by utilizing private funding. I have a few private lenders willing to work with me, but since I haven’t worked personally with one yet, I want to make sure that I secure their investment properly. Do you always have to use a Real Estate Attorney for this, or are there some general contracts or documents that I can retrieve from somewhere that can be used when working with private lenders? We want to work together without having to form a partnership through a legal entity such as a LLC if possible. Appreciate any help/guidance. Thanks!

    • Dave Van Horn

      Hi Niko,
      Thanks for your question. It’s definitely not a bad idea to use a Real Estate Attorney, especially the first time through. There are also investor-friendly title companies, who may provide you with the documents. Or, an experienced private money lender may have the documents as well. But, you’re right. You do want to have proper documentation, because lenders do communicate to each other. Word would certainly travel.
      I understand that you don’t want an LLC partnership, but another option could be setting up an LLC, as the borrower, to protect the lender(s). Many private lenders and hard money guys will only lend to LLCs for two reasons. One reason is that they don’t want an owner occupant; they want to have a valid deed in lieu so they can avoid a long foreclosure timeline in the event of a default. In some states, such as my state of Pennsylvania, the recording of a deed in lieu could be contested by an owner occupant. Another reason is that these lenders don’t want to violate any usury laws.
      I hope this info helps!
      Best,
      Dave

  9. Great information and thanks for sharing Dave!

    I am curious to read your response to the question asked above by
    Lee Derby regarding newbies.

    I’m thinking since I am a newbie maybe private lender funding is not my best option for my first deal, instead I’m hoping to find an equity partner who can fund my first deal (or more) which will allow me to build my portfolio as well as my credibility to private lenders.

    Your thoughts Dave?

    Thanks
    Klee

    • Dave Van Horn

      Hi Klee,
      Thanks for your comment! It sounds like you’re on the right path. I think partnering with someone is a great way to get started building your portfolio and developing a bit of a track record, so that you’ll have more credibility to private lenders. I hope my response to Lee Darby is helpful to you as well. Let me know if you have any other questions!
      Best,
      Dave

  10. Hi Dave,

    I’m currently a note investor on LendingClub, but I’ve seen your podcast and read as much as I can on notes through you. Your wealth of knowledge of the business is phenomenal. I feel very confident in working with you, but real estate notes is a scary world with so many factors. What would you suggest be a great place to get started for someone looking to increase their monthly cashflow? non performing 2nd liens? Besides hiring a real estate attorney, is it highly recommended to buy your course for 2nd non performing liens? What is discussed in the course in particular?
    I’d like to one day be an active investor in the 2nd lien marketplace, and I’d love to hear your thoughts to get started.

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