Mortgages & Creative Financing

How Do I Raise Money for My Deal? Considerations Investors Should Take Into Account

Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
171 Articles Written
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This question is prevalent on the BiggerPockets Forums, and as you can imagine, everyone has an answer. And yet, this is a very difficult question indeed!

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This will be a short piece, but I think straight to the point. Hopefully it gets you thinking in the right direction.

The Answer

I am not smart enough to outline all of the answers for you. The best I can do is point to some of the realities to be reckoned with in hopes that your creativity and problem-solving skills will take you the rest of the way.

Related: How I Raised $5 Million to Buy an Apartment Complex in 2 Weeks — While on the Beach

The SEC

First things first: Unless you are licensed to sell securities, you are not allowed to advertise investment opportunities, or you will put yourself at risk of getting into some serious hot water with the SEC. I know what you’re thinking—but an investment is what this is; how do I avoid that? And the answer is: You cannot sell investments. Nor can you advertise as such, period. Get it?

You can, however, tell a friend of yours what you’re up to, and when they ask you if there’s a way they can play along, you can have a conversation with them around your dinner table. I’ll leave it at that.

If I Offer High Enough Returns, Will People Jump In?

Well, I just told you that you are not allowed to sell investments or offer returns. If your friend is interested in knowing what you are doing with you part-time job in real estate, then once you’re done with dinner, you can take that cup of coffee into the office and show them your plans. Perhaps they find it interesting, or perhaps they’ll think you’re nuts, which is more likely…

But that doesn’t really matter because projections of returns do very little to attract dollars into deals. The reputation, and more importantly the track record of the person in charge of execution—which in this case is you—is of the essence.

Related: How to Use Knowledge of Tax Benefits & Credits to Land Investor Money

Do You Have a Track Record?

If the answer is no, unfortunately you will have to be speaking to someone who really cares about you, wants to help you, and wants to participate in your rise. You will need to be talking to someone who knows and loves you, who believes in you, and for whom your success is as much of value as any dollar-denominated thing.

Do you have access to people like that?

Get it?

Investors: Have you had success raising money for your deals?

Let us know your take on this subject in the comments section below.

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Ben is the creator of Cash Flow Freedom University, the author of House Hacking, and a noted Multifamily Underwriting coach. Through his company, Source Capital LLC, Ben currently operates $40M of multifamily real estate. Learn more about him at JustAskBenWhy.com.

    Amanda
    Replied about 4 years ago
    Hi Ben. Good article. Many new investors don’t understand that there are regulations to follow regarding raising private funds for real estate so it’s always good to hear others pass along those words of wisdom. There are however, ways of doing it without doing the full blown registration with the SEC. You can raise capital under the Rule 506 Exemption as an example. It’s much less expensive than the full blown registration, involves a lot less paperwork, and allows you to advertise to accredited investors. Cheers! …Amanda
    Kay Durand from San Francisco, California
    Replied about 4 years ago
    Thanks so much for including this piece of information. I am interested in getting started in real estate investing. I am 23 and a student ,so investor funds will be important to me. Any recommendations on where to start in terms of finding a property? I’m very interested in Leed certified homes. I live in SF california and am in the process of getting my Real estate license but have one more class to take. I’m also interested in the whole bay area, not specifically in the city . Thanks!
    Maria Giordano Real Estate Investments from Gilbert, Arizona
    Replied about 4 years ago
    Amanda, If you are referring to the 506c which is the only one of Rule 506 that allows you to advertise on your website, Facebook, mail, etc… you still have to file that with the SEC. There is also the 506b which doesn’t allow you to advertise but after a few touches you can talk to a potential investor about your opportunity if they are a stranger. The 506b allows you up to 35 non-accredited investors which for most is actually easier. Either way they require you to file with the SEC. I’m a seasoned investor and I’m currently doing two separate filings with the SEC on two new investment opportunities that I have going.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied about 4 years ago
    Amanda – 506 D is precisely what most syndicators use most of the time. The SEC attorney fees start at around $10,000 most of the time. The paperwork is tremebdeous. Unless raising multiples of millions I wouldn’t think of doing Reg 506. Thanks for reading!
    Amanda
    Replied about 4 years ago
    Hi Ben. Good article. Many new investors don’t understand that there are regulations to follow regarding raising private funds for real estate so it’s always good to hear others pass along those words of wisdom. There are however, ways of doing it without doing the full blown registration with the SEC. You can raise capital under the Rule 506 Exemption as an example. It’s much less expensive than the full blown registration, involves a lot less paperwork, and allows you to advertise to accredited investors. Cheers! …Amanda Reply Report comment
    Geoffrey Jones from Flushing, NY
    Replied about 4 years ago
    I am actively investing now and have been looking for ways to raise more capital for larger investments. This 506c and 506b rules sound fascinating. Tell me where can I get more information on how to start with this and what are some ways to find private investors using this rule?
    Amanda
    Replied about 4 years ago
    HI Geoffrey, As Maria stated, even the exemptions require registration with the SEC. My apologies if my post did not imply that. I would recommend contacting a SEC attorney. Cheers!
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied about 4 years ago
    Great article Ben. I’m working on building a track record.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied about 4 years ago
    Good!
    Jared Ackerman Investor from Clayton, New York
    Replied about 4 years ago
    Pretty straightforward article Ben. When you say track record do you mean experience in real estate in general or experience in syndication? Thanks!!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied about 4 years ago
    Both 🙂
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied about 4 years ago
    To those who asked, Jillian has posted blogs on BP before. She’s nationwide and speaks at alot of events. http://www.syndicationlawyers.com/about-us/jillian-sidoti/ Last time I called her, a syndication offering of a PPM etc, was $10k-$13k. A simplier 506xx filing would be much less. There’s SEC 506xx filing services that are very modest in price. $100 ish, which I got started but never finished. The crux in any 506xx exemption registration or a full blown PPM is the LLC operating agreement AND subscription agreement AND disclosure doc. The whole purpose of the registration process is to force you the funds raiser to put effort into disclosure, a process for vetting (accredited) investors, determining suitability of your offering to the prospect. The SEC lawyers (who are just service providors) give you your customized disclosure doc, and the appropriate project specific LLC, operating agreement and subscription agreement docs. Then the training on how to operate raising funds legally. Most folks start out doing Joint Ventures with investors as active partners before venturing into the passive never met before investor (lendor) space. Some states are very strict, Ohio, Oregon, Washington etc etc) are tough places to even do simple JVs. You need to study your local state’s SEC regs as well. In GA, one lender (you know) on one deal, in a 1st lien is not a security. This is not true in Ohio etc.
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied about 4 years ago
    This topic gets started as buyers realize they can’t raise all of the down payment to buy a larger multifamily or even a flipper who wants to build a $500k spec house may for some reason not be able to or want to do the deal on hard money. So both types of investors start pondering raising the funds from a group of investors. Usually this goes beyond the local REIA to include folks you’ve never met and more importantly don’;t know you or your track record. Investors start wanting to pool together 10 investor’s $50k each to build that $500k spec house, and split the proceeds. Issues and red flags: pooling funds Taking money from un-vetted lenders (are they accredited or Grandma and $50k is 100% of their savings) Entity and operating agreement needs of funds raising. What the flipper scenario is: a “blind fund” where the lenders/investors tossed in $50k with out being tagged for a specific project. The proceeds of the $500k flip may even stay in the fund, to fund the next deal. Till some exit / dis-solution date that might be spelled out in the fund’s LLC operating agreement. Just tossing out some more clarity. Things are easier if: no pooling, you know the lenders for a long time, if the lender(s) are accreditied. Google accredited investor qualifications, it’s for a specific project, the lenders are on 1st lien if not then they are members in the LLC. One lender one project is the easiest form to fund raise for and be legal by following either a JV if your state allows it, or a 506xx registration. If a 506 registration, expect to be the managing partner in an LLC with a separate lender class of stock.
    Dan Miles Investor from Fuquay Varina, North Carolina
    Replied about 4 years ago
    But my buddy can loan me cash for a deal and i can do a cashout refi and pay him back right?
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied about 4 years ago
    Hi Dan, It’s a simplier world when 2 people create a business togethen than act like you are borrowing money, even a simple Joint Venture with a JV agreement. You’d be prudent putting your buddy on a 1st Lien and a note. Ohio I believe would call this a security so being “in compliance” is a state by state and your JV/paper work wording specific situation. The trip wire in borrowing funds is when a deal blows up, or even if all goes well but the investor disagrees with something, and they call the State SEC, States Attorney etc. This is where following all steps appropriate for your state come in,, to protect you and your investor. I’m not an attorney nor do I know your state, so giving you a safe legally based answer for your simple sounding question isn’t possible. My tactic would be (assuming you are not in one of the problem states like Ohio, WA, OR…) is to write a JV agreement that you both agree to. Cover disagreements, deal going bad, selling out, put your buddy on 1st Lien, with a note that is comprised of the JV agreement… Work with your buddy as a full partner is better than just you making all decisions and he’s a silent lender. The later smells more like a security than a JV plus your buddy will be more aware of the problems as they come up and will hopefully less likely to cry foul if the deal does not work out exactly like how you said. Steer clear of “promised results” any kind of numerical returns. No numbers, just describe the deal scenario, and how past deals turned out. Say: no guarantees, and you could loose some or all of your money. If you give the latter disclosure verbally AND in WRITING, you’ll be better off. I’m describing what you can google for: “real estate deal disclosure document”