In a perfect world, you’d have all the money you would ever need for your real estate deals. But in a perfect world, you’d also have a six pack and could sing like Ariana Grande. So we know that this world is far from perfect. Though I can’t help you with the latter, I can help you with the former. I will tell you how to raise money for your next real estate deal.
In fact, I just bought a property by raising over $3 million from 40 different investors in a real estate fund—and will be be doing a whole lot more of that in the future. I thought I’d share with you a bit of what I’ve been learning about raising money for my deals so you can too.
First Thing’s First: Find Good Deals
First, let’s talk about the No. 1 fundamental truth about raising money. In order to raise money, you have to have a great deal. Think about it. No one is going to give you money for a deal unless they are getting something out of it. And they’re not looking for a high five or a hug. They want profit—and so do you! There’s got to be enough meat on the bone to go around for everyone. Therefore, the first tip in knowing how to raise money is knowing how to find and analyze good deals.
If this is something you struggle with, you’re in luck. Every week at BiggerPockets we provide free webinars where we walk you through that very topic. Assuming that you’ve nabbed a good deal, now what? Let’s talk about the fundamentals.
Debt vs. Equity
There are a couple of ways to raise money: debt and equity. Don’t get scared off by these fancy real estate terms. Debt simply means you’re borrowing money from somebody—usually at a pre-defined interest rate. In fact, I just bought a triplex in Maui, Hawaii, and borrowed money from a business associate for the deal. I owe him money every single month no matter how good or bad that property does. Equity, on the other hand, is more like a partnership where the person giving you the money participates in the financial ups and downs of the deal.
Early on in my career I wanted to buy a certain property. Problem was I had no money or ability to get a loan. Instead of taking out a traditional loan, I raised the money for the deal. I approached a friend and asked him to become an equity partner. He paid the down payment, which was about $30,000. We split the deal profits 50/50.
If you’re looking to raise money, you’ll have to decide if you’re going to do this via a debt method like borrowing money from a bank, company, or individual—or taking the equity method route. Although it’s possible to offer investors a little bit of both, it’s not quite as common so we’re not going to worry about that right now.
Instead we’re going to focus a little bit more on the equity side since that’s much more likely where you’ll be headed on your real estate investing path. Most investors that you want to raise money from don’t just want a flat interest rate. They want to participate in the success of the deal.
You’re the Investment
But before we go any deeper on this issue, let’s talk about something a little bit more important. Why should somebody invest with you? Because, in the end, this matters more than the deal itself.
I know I just said knowing how to analyze and find a good deal is important—and, trust me, it is. But people don’t invest in a deal; they invest in you. They invest in your ability to make the deal happen. Think about it. If I had the world’s best real estate deal, but had my 3-year-old daughter be in charge of it, how do you think that would turn out? You guessed it. Not well.
The K.I.T.E. Method
In my experience, if you want to raise money, you must be able to demonstrate that you have the four basic human principles I’m about to outline. I called the K.I.T.E. method because it’s an acronym…and I like acronyms.
You need to ask yourself this question: Do you have the knowledge needed to pull this off? If you’re brand new to investing, you might not. The good news is information is everywhere and it’s usually free.
Start reading books, listening to podcasts (ahem, like the BiggerPockets Podcast), and take other investors out to lunch and ask questions. Ask yourself: Are you the smartest person on this topic in your area.? If you’re not—and I’m sorry but you’re not—then you know what to do. Keep learning.
I = Integrity
Integrity means doing what you say you’re going to do—no matter what. And it doesn’t mean having integrity only when people are watching. You gotta have it even when people aren’t looking. When you say you’ll wake up at 6 a.m. and go for jog, but you hit the snooze button, you lie to yourself. When you say you’re going to finish that project at work but 5 p.m. comes and you’re not quite done. Do you stay late? Maybe even all night just to finish it? If you have integrity, you should.
When you have integrity, it means people can trust you with their money because you’ve been trustworthy with all areas of your life. One of my favorite saying sums up integrity pretty well: “How you do anything is how you do everything.” So start living a life of pure integrity.
Real estate investing, while simple, is not always easy. You need to have a plan and be able to demonstrate exactly how you’re going to make a return on the investor’s money. You should be able to tell them how the deal will turn a profit; who’s going to manage the deal; what kind of legal entity you’ll use; what happens when things go wrong (or right); when investors can expect to make their money, as well as how much money they can expect…and the list goes on.
These are all questions that you need to know the answer to. You also need to be able to communicate these strategies to potential investors. That’s the tactical side of things.
The No.1 predictor of success is not what someone says they’re going to do, but whether or not they’ve done it before.
Experience speaks volumes when trying to raise money—and for good reason. In the beginning, you don’t know what you don’t know. Many don’t even know that they don’t know what they don’t know. Too confusing? Moving on…So how do you handle that when you’re just getting started?
Well, there’s a couple of ways. You can gain experience on a small deal on your own before raising money. Borrow money from banks or hard money lenders before you start borrowing money from other people. Or start with friends and family who don’t really care about your experience because they’ve seen your relevant experience in other areas of your life. Lastly, you can borrow somebody else’s experience.
I mentioned before how I started raising money for some big real estate deals. But because I had never done a large syndication or a real estate fund before, I decided I needed some more experience on my team. I brought in a super experienced investor named Brian Murray. He’s had a ton of experience investing in large real estate deals. And because I’m trying to buy mobile home communities, I also brought in Ryan Murdoch, who has experience managing mobile home communities. By bringing these guys onto my team, I’m able to borrow from their experiences, boosting my own in the process.
You can do the same thing. You might have to give away some of your profit, but if that means being able to do more deals because of what those skilled team members contributed, then it’s worth it. Giving up some profit ended up working in my favor. My goal was to get to a thousand units in three years, and here we are six months in already in contract for over 1,000 units. That’s the power of a team with experience.
There you have it, the K.I.T.E. method. But I want to walk you through the deal I did so that you can do the same thing. Here are 10 tips for doing a deal.
1.Keep It Legal
It seems obvious, but I still need to say it: Keep it legal when you’re raising money for real estate deals. You’re basically creating a security, so that the U.S. Government monitors and controls how you can do that.
For our deal, we opened up a 506(c) fund. Others have opened up a 506(b) b fund. They’re similar but differ on who you can take money from. For example, with my 506(c) fund, I can only accept money from accredited investors, meaning people who have a good amount of money or a good amount of wealth. With 506(b) you could take money from non-accredited sources, but you can’t advertise. I, on the other hand, can advertise with my 506(c) fund—like talking about it in a video, or writing about it in a blog post.
Knowing the legal way to fund deals is important. Now, if you’re just raising money from one or two people for a deal it won’t necessarily be a security that the government has to monitor. But you’ll need to do the proper paperwork, talk to an attorney about creating an LLC or corporation. Just know you’ll have paperwork to fill out if you decide to set up a company, which you can talk to a CPA and attorney about. All in all, make sure you cover your bases legally.
You need to network and talk about your real estate ambitions at events. No one will know if you’re investing—or raising money—in real estate unless you talk about it. Your job is to go out there and tell people what you do and what you’re trying to do. A great way to network is attending real estate conferences.
We recently held the BiggerPockets 2019 Conference, and it was amazing. About 1,000 real estate investors attended and networked at that event. I met individuals who later invested in my real estate deals. Why? Because I told them about what I’m doing and why I’m doing it. I showed them the K.I.T.E. aspects of my life—that I had knowledge, integrity, tactics, and experience—to be able to pull off this deal.
So get out there and talk about your real estate investing. Attend local events so you can meet like-minded people. Don’t know if you have any local real estate events in your area? Visit BiggerPockets to find a list of events in your area. If you don’t see any, then you can start one.
3. Start an Email List
You’ll need to get in contact with these people regularly, and email is a great way to do it. There are a lot of providers our there to get you set up.
Some of them cost money and some of them are free, but you want to start an email list of potential investors and then communicate with them regularly. So when you’re actually ready to pull the trigger on a deal, you have the email of numerous potential investors.
4. Create a Sample Deal
If you don’t have a deal yet, create a sample deal that allows you to talk with potential investors about what you want to invest in. You could tell them about a property you would’ve invested in had you gotten to it earlier. You can provide them with the figures and your overall plan of the deal—as well as how much it would’ve profited the investors.
This shows people that you’re worth investing in because you do your homework. By doing this, you’ve created the opportunity for them to want to partner with you next time you show them a potential deal.
5. Communicate Regularly with Potential Investors
You have that email list. You know them. So make sure to email them regularly. Show them the numbers and potential deals you’re working on. You want to build a relationship with these people because these are not just random investors. These are partners of yours that you’re going to be working with time and time again.
For example, in my syndication with the 506(c) fund, there is a general partnership. This is made up of me, Ryan, Brian and a few others. We are the ones running the deal. The other side of that—the majority of the equity actually—goes to the limited partners aka your investors. So we want to make sure we’re communicating regularly with the limited partners so that they feel like they’re in the know and involved in the process. Keep them in the loop and you’ll build trust.
6. Bring in a Key Principle
You may need to bring in a key principle (KP) if you or your partners’ net worth does not equal the loan you’re borrowing. For example, if you’re trying to borrow $5 million for a commercial investment, but your net worth isn’t that amount—or higher—you’ll need a KP. You will give equity to your KP, and the percentage you give depends on how much the deal is worth. It’s usually between 15-20 percent.
If something goes wrong, the KP will be able to handle it because they have the net worth. If you don’t know any KPs, start networking with experienced real estate investors and people doing large deals.
7. Create a PPM and Other Legal Documents
I mentioned how you need to keep it legal. One way to do that is acquire all the necessary documents. For example, in our fund our SEC attorney created our PPM documents. This basically spells out everything about the deal: who gets what, how they get it, what you’ll be doing, and the risks involved. So make sure you get your PPM, as well as show your investors to review it.
8. Fill Out the Required Paperwork
This means you and your investors. At this point in the process—when you’re ready to start actually raising money and accepting money—there’s a lot of paperwork to be filled out. You need to get that PPM over to the investors, and then you have to get the investors to sign some of the legal documents that your attorney will prepare for you. Then you’ll need to countersign them and make sure that everything’s kept neat and organized.
There’s are a lot of different software programs that can help you with this. We’re currently using a company called Investor Deal Room, but there are a lot of companies that can help you organize all this paperwork, get you squared away with signing documents, and all of the other factors that go into the legal side of raising money.
9. Get the Money Wired
If you’re raising money in a big syndication or a fund like I’m doing, those individuals are all going to likely fund your bank account and then you’re going to take all that money and buy the deal by paying the attorney or the title company.
If you’re doing a smaller deal, it’s possible you’ll borrow money from one to three people. They might wire their money directly to the title company. It just depends on whatever the person doing the closing tells you to do.
10. Close the Deal
Once all the money’s been raised and the paperwork has been signed, you’re going to close on the deal. But your job’s not done. When you’re raising money, you still need to communicate with your investors continually by letting them know what’s going right and what’s going wrong. At least send out statements showing how good—or how not good—the investments are doing monthly.
And that’s it. Raising money is not an incredibly complex process, but it is a sacred one. People are trusting you with their hard earned money. It’s your job to make that money grow. So treat it with the respect that it deserves and you’ll see your investor pool grow over time, giving you a greater and greater ability to raise money for larger and larger deals.
What are your takes on the K.I.T.E. method and what have you found helpful in raising money for deals?
Share with a comment below!