Why You Should Raise Money to Buy Apartment Buildings
People tell me they’ll start their investing career when they have money.
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But who knows when that will happen?
And so they wait. Or they’ll say they can’t see themselves putting a building under contract if they don’t already have the funds in the bank – who will take them seriously? Or how can they raise all of the money in time to close? And how can they get money from investors when they don’t have a building under contract? It’s a catch 22, and so they’re stuck.
I’d like to take these objections entirely off the table right now.
Raising Money From Private Individuals
The truth is, you don't need tons of your own money or good credit to get started with apartment building investing. The secret to getting started now is to raise money from private individuals. Here's why.
- You don’t need your own money. I hate stating the obvious, but since the lack of money is the biggest objection to getting started with apartment investing, it deserves to be stated plainly. Just to re-emphasize this point, if you raise money from investors you don’t need to use or have any of your own.
- You can get more deals done. Even if you have your own money to invest, there is only so many deals you can get done. On the other hand, if you are able to raise money from others, the sky is the limit. Your ability to accumulate property is then only limited by your ability to find good deals. The ability to raise money is an incredibly valuable skill to have.
- You can do bigger deals. With the backing of investors, you can go after bigger (and more lucrative) deals than just using your own funds.
- You have more eyes on the deal. Richard Feynman, the famous physicist, once said that “the first principle is that you must not fool yourself and you are the easiest person to fool.” When you’re using your own money, no one else is looking over your shoulder, and you’re more likely to make mistakes. If you can convince others to invest in your deal, chances are, you actually have a good deal.
Disadvantages to having Investors
However, there are some disadvantages to having investors:
- You now need to report to your “bosses”. Chances are you’ll have to report to your investors in one form or another. You may have to give updates and financial reports to your investors to keep them posted. This certainly is more work than if it were just you in the deal. On the other hand, analyzing the Profit & Loss (P&L) statements and sending out reports make you pay more attention to the deal. You should do the same if there are no investors, but few of us have this kind of discipline, and as a result we don’t pay as much attention to the investment like we should.
- You may lose some control. You may not be able to make all of the decisions without a vote from your investors. As I’ll discuss in later posts, there are ways to mitigate this risk with how you structure the deal.
- You won’t get 100% of the profits. That’s true, but as the saying goes, 100% of nothing is still nothing. If you can own 100% of the building by using your own money, great! But if not, use investor money and get in the game!
All in all, though, the advantages of using other people's money far outweigh the disadvantages. This doesn't mean you shouldn't use as much creative financing as you can (especially seller financing). Bottom-line, if you get skilled at raising money from others (like Donald Trump!), you can get started with real estate investing TODAY.
Thanks for reading, and let me know what you think!
P.S. You’re probably thinking, “OK, Michael, I can see your point, but how do I raise money from others?” Because this is such an important topic but not frequently talked about, over the next few weeks, I’d like to share with you some of my experiences with raising money and syndicating deals, and hopefully you’ll find that useful. Stay tuned!
Photo Credit: ZachAncell