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The Simple Yet Profound Truth on Raising Money for Your Deals In Real Estate

by Ben Leybovich on June 3, 2014 · 14 comments

  
Raising Money for Your Deals In Real Estate

Sometimes when I write I feel like being creative and take the long way to my point.

Other times, I really don’t know what to write, in which case I usually see what my friend Brandon Turner wrote about and just argue the other side (cause he is usually wrong, of course!)

Today’s article is going to pour out of me as if laxative is involved.  I know exactly what I want to say, and it’s going to come out quickly before I forget.  I’d like to think that this is going to be powerful and actionable…

We are Talking About Raising Money for Our Deals – How do We do It?

Well – it’s hard indeed, especially in the beginning.

I will not blow sunshine up your armpit and tell you that you can dive into raising hundreds of thousands and millions of dollars just like that – on your first attempt.  No, I don’t believe that you can.

I will say this however:

What it takes to raise $10,000 is very similar to what it takes to raise $1,000,000 – it just takes more of it!

So, What does It Take…?

One thing is for damn sure – you don’t raise by posting “I Want Your Money” on the BiggerPockets forums and the Marketplace.  Trust me – you won’t get very far that way!

The first time I raised money it was for a $30,000 deal – an SFR.  This was about 8 years ago.  The second time I raised money it was for a $45,000 deal – it was for another SFR six months after the first one.

Then there was the $90,000 deal, $120,000 deal, $180,000 deal, and so on…

Lately, as many of you know, I am out there in the world large multi-family looking for deals to syndicate – it’s what I am about now days. At the moment, I am completing a feasibility study for a syndicate on a 180-unit apartment community, and within 2 days last week I received verbal commitments from folks wishing to participate in the amount of $1,200,000…

Now, will every one of those people actually come to play when the starter gun goes off?  No, probably not.  That just wouldn’t be reality.  But, I bet about $850,000 will!

While this isn’t enough to do the deal and I need to keep working, I am not oblivious to the gravitas of a bunch of people who have serious money and could choose to deploy it in any way they want, choosing instead to raise their hand in the air and say: Ben Leybovich – count us in…

How did I do it?

I picked up the phone…

Let me say that again – I picked up the phone!

Does this tell you anything?

Here are a Few Thoughts that You may find Useful:

First of all, you need to understand three very powerful words – ready?

Circle of Influence

That’s it! The people in your inner circle are the people who will jump-start funding of your deals.  Think about this – if you can’t convince those who know you best to put money in your deals, how the hell are you supposed convince the world at large?

Everyone of the people I’ve ever raised money with, including every one of the commitments for this 180-unit, has had a relationship of some kind with me that pre-dated this deal. This is important to understand guys – money is about people!

Doesn’t the Opportunity Need to be Good Enough?

Absolutely – the deal must be attractive for people.  But, the deal is not the ultimate driver of investor’s decision.  You are!!!

Without beating this horse to death, you need to understand that YOU are the big opportunity that people invest in.  The RIO, the IRR, and the CCR are a given – people expect those.  But they can get those anywhere, so why should anyone go with YOU?

Which Begs the Question:

Do you deserve it?

This, by the way, is not a question for investors to answer – this is a question you must answer.  Quite literally – are you worth it?  Why should anyone with money and options choose to deploy funds under your management?

What’s so special about YOU?  Are YOU so knowledgeable?  Do YOU have track record of success?  Are YOU honest to the bone or a sleaze-bucket like so many others out there who’ll promise anything to get the money?

Do this Every Day:

Every morning when you roll out of bed, after you pee, wash your hands, brush your teeth, and splash water on your face, look in the mirror and ask yourself the following:

 If I had money, why would I want to invest it with me?

Simple – wouldn’t you say?  One question to unlock the psychology of raising money…

Caveat:

I am going to tell you some truth now.  Please don’t hate the messenger, but you need to know this if raising money for your real estate deals is on the menu:

If you and your friends are spending days on the couch in your parent’s basement, in front of a TV, with one hand on a game joystick and the other hand holding onto a bag of potato chips, I am sorry to tell you there will not be investment capital in your future…get it?

We have circled back to the original thought: who is in your circle of influence?  Who are the people in your life and in your space whose attention you’ve got and whom you listen to?  Who is on your speed dial?

“If you hang out with chickens, you’re going to cluck and if you hang out with eagles, you’re going to fly.” ~ Dr. Steve Maraboli

The choice is yours!

Be sure to leave your comments below!

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{ 14 comments… read them below or add one }

Jeff Brown June 3, 2014 at 9:35 am

It’s all about credibility, right Ben? ;) And you clearly have it with your people.

Reply

Ben Leybovich June 4, 2014 at 2:05 pm

Ha – everyone knows I’m too dumb to lie Jeff… And it doesn’t hurt that I’ve never lost anyone’s money :)

Reply

Kerry Smith June 3, 2014 at 9:46 am

Great, great post Ben! You really drove it home when you said:

“The people in your inner circle are the people who will jump-start funding of your deals. Think about this – if you can’t convince those who know you best to put money in your deals, how the hell are you supposed convince the world at large?”

It’s a tough subject to breach with anyone, but you have to practice, practice, practice. Find out their motivations and their vulnerabilities. Then provide them with a “WiiFM?” What’s in it For Me! They have to have a reason to want to invest. Is it 8, 9, 10% returns? Is it just knowing that they are helping you get your business off the ground?

Find out what they want out of the deal, and do your best to give it to them!

Reply

Ben Leybovich June 4, 2014 at 2:07 pm

“What is in there for me” is a very intricate thing. Negotiation comes down to fulfilling of expectations…

Thank you so much for reading and commenting Kerry!

Reply

Matt Rothwell June 4, 2014 at 5:53 am

Hey Ben,

Could you outline a typical deal? As the poster mentioned above, you’ve got to provide the “whats in it for me?” to the investor. What do you typically offer the investors? When do they get their money back, and what makes it worth the effort for you?

Reply

Ben Leybovich June 4, 2014 at 2:42 pm

Matt,

I offer what the deal will support, which sometimes is less and other times is more. Most of what’s in it for them is ME – I’ve never lost anyone’s money yet, and this has more value to investors than you’d think.

By the numbers, on this one I’m offering 8% preferred annualized CCR with a split thereafter and shooting for mid-teens IRR to investors. Always under promise and over deliver :)

The time-frame minimum is 5 years for a syndicated deal requiring reposition. Sometimes longer.

What makes it worth for me is mostly the equity split at the back door.

Reply

Sudha June 4, 2014 at 9:25 am

I am new to BP. The whole thought of putting someone’s else money on REI is kind of spine chilling for me..whenI am questioning myself if I should put my money on a particular deal..I wonder how you get to that confidence in yourself and your deal..Right now I feel its impossible for me..

Reply

Ben Leybovich June 4, 2014 at 2:47 pm

Sudha,

I am always very cognizant that people’s money is at stake. I underwrite deals conservatively for this reason.

From the investor’s stand-point, however, is this any more dangerous than handing money over to a broker. With me they get paid first, and only after having made them money do I get paid. Stock brokers get paid whether you win or loose!

Confidence should always be balanced with a healthy fear of the beast – that’s my frame of mind. Home this helps…

Reply

Dorothy Templer June 5, 2014 at 12:17 pm

Thank you for this really great post. Even though I know this, it’s like it cleared writer’s block to see someone explaine the simple truth of it. There are many people in my circle of influence who would invest in me! I just need to call them up.

Brilliance in it’s simplicity

Reply

Ben Leybovich June 5, 2014 at 1:43 pm

Most good things are simple, Dorothy :)

Thank you so much for reading and leaving a comment. And welcome to BiggerPockets!

Reply

Sharon Vornholt June 7, 2014 at 8:40 pm

Great article Ben.

Folks invest in the property buy they are really investing in you. I agree with Jeff when he said it’s about your credibility and whether or not they trust you. When you need to raise money and you look to your circle of influence there is one thing I have learned; don’t prequalify or prejudge folks. You never really know who has a pile of cash sitting in the bank somewhere.

You are definitely the numbers guy. :)

Sharon

Reply

Ben Leybovich June 7, 2014 at 8:51 pm

Thank you Sharon!

I agree – you never can pre-judge who has money and who doesn’t. In fact, more often than not, people who you’d think have it, don’t – and visa versa…

As to numbers – In my opinion that what makes the difference is seeing past the numbers. Numbers are a must, just like a house has to have functional plumbing. But that’s only the first 10% – the bird’s eye view. Those investors who develop perspective which transcends the numbers succeed, the rest bounce on proverbial shit…pardon my French :)

Thanks so much for reading and commenting Sharon!

Reply

Neal Thomas June 17, 2014 at 4:20 pm

I have had clients show up that gave me the impression I would never be able to find a home they could afford. Only to later find that they had other means of financing. In one case, I had a young college student with his pregnant wife ask me to show them homes. As I started my normal Buyer’s consult, I discovered he had no job and no real savings. While many agents may have walked away from helping him, I dug deeper into his situation. Turns out that his grandfather funded him the money to buy a home. In probably half of my cash buyers there is usually a trust fund or family member willing to fund. That is why I never turn away someone interested in buying real estate until I find out their full situation. No matter what it appears to be.

Reply

Ben Leybovich June 17, 2014 at 4:35 pm

Exactly Neal!

Reply

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