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What I Learned Raising Over $30 Million in Private Capital: Types of Money

by Dave Van Horn on August 14, 2014 · 11 comments

  
Types of Money

A week ago, I had the opportunity to present about Raising Capital at the AAPL – American Association of Private Lenders event in Philadelphia, and although some of you missed it, why not cover some of the highlights?

Sure, it’s not the same as being there, especially since I had my securities attorney and another large private capital fundraiser answer questions on a panel at the end.

But, we covered some key components, such as: Types of Money, Money Myths, Mistakes Raising Capital, Tips on the Best Ways to Raise Money, Investor Relations, and the new Jobs Act, especially 506(c) and its implications.

Today, I’m going to cover Types of Money and why they’re so important.

If you can demonstrate to people where they can free up money or save money on this like taxes, it could be a huge help to them. Also, if you have an investment vehicle to put capital in, then you’ll probably raise more money too.

The concept of the four types of money really comes from Robert Kiyosaki: There’s Your Money, the Banks Money (OPM or Private Money), there’s the Tax Man’s Money, and there’s the House’s Money.

He also goes on to teach that there are three different asset classes that one can invest in: Businesses, Real Estate, and Paper Assets, with pros and cons to each class.

Businesses

Pro: This is the asset class that offers the highest of all returns on investments.

We once had a guy, who wanted to buy PPR, and his whole model was to purchase start-ups, add value, and in 3 years flip the business for a profit. We only have to look at Instagram or Microsoft to see how profitable investing in a business can be. If you really think about it, many tax laws were written to favor business owners.

Con: Businesses are the toughest asset class to own, develop, and maintain.

Related: Working “On” Your Real Estate Business vs. “In” Your Real Estate Business

Real Estate

Pro: Real estate is the easiest of asset classes to leverage. It’s easier to borrow money for real estate than it is for a business or paper assets.

Con: For the smaller investor, real estate can be far more capital intensive than investing in paper assets. For example, I can invest $25 in Lending Club, a paper asset in the form of an unsecured note, but it’s hard to invest $25 dollars in a piece of real estate.

Paper Assets

Pro: Paper assets are the easiest of all asset classes to get in and out of. An example for me is that I can sell a note in less than 30 minutes. I’m not so sure that I could sell a piece of real estate that quickly. I could also trade a stock option in seconds or minutes.

Con: You probably have the least financial control. There are definitely fewer tax advantages, and they can also be highly volatile.

As Doug Andrew, author of “Missed fortune 101,” says, “These markets are like a person with a yo-yo going up stairs. Over the long term they go up (stairs), but there are ups and downs along the way (yo-yo).” And, Andrews advises his readers to protect themselves from the ups and downs of the markets.

Many people say that they’re diversified in one mutual fund or maybe in several mutual funds, but to me, if you’re only investing in one asset class, then you really aren’t diversifying.

I find to be truly diversified; you need to be investing in more than one asset class. An example of this would be Donald Trump, who invests in Real Estate and Business, or Warren Buffet, who diversifies between Paper Assets and his Business.

Related: When Building Your Real Estate Plan – Don’t Forget These Six Items…

I like to think that I’ve been able to create synergy by investing in a business like PPR with OPM (Other People’s Money) from a Private Offering, while also using the Bank’s Money or Private Lenders to do my Real Estate deals.

I also like to think that I’m using as many Tax Strategies as possible to free up more of my money, by maintaining my RE license to take advantage of more passive losses through depreciation (not capped at $25K), and by setting up an ESOT (Employee Stock Ownership Trust) at PPR to save tax on our business revenue.

I do this, while also using my own money to personally invest in re-performing notes, which actually create synergy amongst all three asset classes.

It’s really hard to beat buying a note at a discount, with a high yield, that’s backed by real estate, with a homeowner occupant, who has a vested interest in paying their loan because they need a place to live.

And last, I like to think I’m able to take some of the House’s Money off the table by putting some money in a more protected, tax sheltered vehicles like IRA accounts and Insurance Contracts.

Many people tend to put all their money back into their business or their real estate investments, etc. But, I’m a firm believer that houses were meant to store people and not cash.

There are always market downturns, lawsuits, and bankruptcies out there, but there are also safer buckets that can be utilized to take some of the House’s Money off the table.

So, for me, I just teach some of these concepts to folks I care about; whether it’s retirement planning or tax saving strategies. And, by truly creating ways to educate people, you’ll probably raise more money too.

(Next, we’ll cover Money Myths and Mistakes I’ve made Raising Capital.)

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{ 11 comments… read them below or add one }

James Evertson August 15, 2014 at 7:21 am

Great post. Is it easier to find someone local to invest in notes or are there websites that offer this? What are the pros/cons of different ways to find notes to buy?

Thanks again

Reply

Dave Van Horn August 20, 2014 at 7:30 am

Hi James,
Thanks for the positive feedback! It does depend on your model. For example, if your goal is to invest in only a few notes, you may be able to find enough locally. But, with notes, I think it’s easier to buy nationally, and that’s what we do.
There are certainly websites that offer notes, and these are typically from funds and large servicers, such as PPR, or note exchanges, such as Loan MLS.
I actually wrote an article on this topic awhile back if you’re interested; it’s titled “Finding and Buying Performing and Nonperforming Notes.”
I hope this info helps! Please don’t hesitate to reach out if you have any further questions.
Best,
Dave

Reply

Nick August 15, 2014 at 7:36 am

Great article Dave….I’m already looking forward to the next one!

Reply

Dave Van Horn August 18, 2014 at 7:35 am

Thanks Nick!

Reply

Michael Evans August 15, 2014 at 1:19 pm

You are practicing what I preach. I m all about educating people about personal finance so they can make better-informed financial decisions. It’s good to see affirmation of what I’m doing. Keep spreading the word.

God Bless You!

Reply

Dave Van Horn August 20, 2014 at 7:31 am

Hi Michael, thank you for the positive feedback! It sounds like you’re out there fighting the good fight too. Keep it up.
All the best,
Dave

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Antonio Coleman August 15, 2014 at 8:50 pm

Dave, what I found out if something have value, and potential for a return, finding investors are pretty easy. Lots of my earlier deals was all about finding that deal and raising money through local investors. Just have to hit the pavement to find them.

Antonio Coleman “Signing Off”

Reply

Dave Van Horn August 26, 2014 at 8:17 am

Hi Antonio,
You have a great point, especially for those just getting started raising money. I had to do something similar in the beginning.
But, I’ve found that over time if you develop a track record and a solid business model, then you may be able to approach it in a differently. For example, if I have a solid business model built out and a great track record, I’ll find investors, and then I can jump on those deals of value quicker. Focus would shift to how many deals can I do if I did have an unlimited supply of capital?
Thanks for your comment!
Dave

Reply

Shaun August 17, 2014 at 9:18 pm

“I’m a firm believer that houses were meant to store people and not cash.”

That is phenomenal! I love this line.
@Brandon Turner you need to make this a tweetable quote! :)

Reply

Dave Van Horn August 26, 2014 at 8:18 am

Thanks for the positive feedback Shaun!

Reply

Shaun August 26, 2014 at 8:29 pm

I actually added that to my list of favorite quotes.
The people proceeding you on that page are Einstein and Aristotle.
You keep good company. :)

Reply

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