I have not posted on this site before but am curious to find out if it really is as powerful as every Podcast seems to suggest.
By way of background, I am a CPA in Colorado and earned by Masters in Tax from the University of Denver. I worked in Big 4 public accounting for two years as a tax associate focused on REIT taxation and structuring and I currently work for a REIT in the Denver area that invests in farmland.
I would like to start developing some independent real estate investment opportunities and will need to raise equity capital. I understand the modeling that goes into real estate deals as I have done a fair bit of such modeling in my career thus far. I also understand how capital stacks and equity waterfalls work in typical private equity deals.
But here is my question. If I am able to source deals through a sound brokerage network and am looking to get to deals of relative scale faster (raising between $1.5m to $2m in equity capital at an 8% hurdle), where is the best place to find people interested in investing in a new GP with limited to no "street credit"? All the equity sources that I know of are institutional sources that invest in REIT level deals and are WAY to large to ever take an interest in my middle market $3 to 6 million deal. RealtyShares was one option that I found interesting but they basically tell you that they are a crowd funding site for middle market institutional players. They also charge 10% on common equity which seems aggressive in the current real estate market.
Interested to hear what the BiggerPockets community has to say about this topic.
@Account Closed welcome to BP! As a participant in this site for many years I can assure you it's all that the hype says it is.
You have a great background for raising capital from the perspective of structuring offerings, making projections and managing cash flow and reporting. What I didn't see is your real estate pedigree. In other words, finding and getting deals is one part of the business, but it is the smallest portion. The rubber meets the road on the operations side and what your investors will be looking for is your track record for running a property and performing on your projections.
If you don't have a track record as a real estate operator you need to develop one. So this starts the classic chicken-and-egg scenario. Can't get the capital without the track record, can't get the real estate to develop that track record without the capital.
Investors invest in your deal because they trust you. If you have a track record you develop that trust by showing the track record. If you don't have it, then your most likely investors are people who already trust you. That is your friends, family, colleagues and inner circle. As much as no one wants to believe this--it really is the best place to start.
When I raised my first fund, my investors were my co-workers. I was just leaving a career in law enforcement and most cops don't have a lot of money so I literally took investments as small as $5,000 and raised only $500K. That was a launching pad to a 29-year (and counting) real estate career and over $80 million in investor capital since. And I wasn't buying multi-million dollar apartment buildings back then, either. I was buying houses to fix up and resell. The good thing there is those transactions cycle quickly and you build a track record of performing for your investors pretty fast. Not saying that's the only way to get this done, it's just my story.
Unfortunately no place exists where investors are congregating as they await your deal. Raising capital is harder than the guys selling classes on how to do it will tell you. And with your experience of seeing how easy it is for the PE shops to raise boatloads of capital? You'll get discouraged pretty quickly if you carry that expectation over to your new venture. It's just really tough to get the snowball rolling. But once it does, it's a hell of a ride.
Brian thank you for your comment. You are correct to say that I do not have a RE investment track record myself yet. I do have a group of close family friends that might invest in the right deal (just like an angle investor would invest in any start up venture, mine just so happens to be real estate and not tech). But I hate to be the person back home asking for my family and friend's money. I would much rather raise the money from other "angel" investors if they exist in this space (similar to a venture capital pitch and deal). As I mentioned above, all my experience is with larger institutional players (sovereign wealth funds, public capital markets etc).
Your comment confirmed what I was expecting to be the case but its good to have a sounding board.
All that said, raising institutional money at a REIT is a tough business prospect as well. No free lunches, that's for sure.
I appreciate your note. The BP community has already been informative.
John, couple of things:
First, $2M stack doesn't go very far. Specifically not with an 8% pref, which essentially requires for this to be a value add, requiring CapEx stack.
Secondly, most of the time I would think you'd use Reg D 506b, but there you can't advertise. This means personal connections is the name of the game.
Is this site powerful? Yes, but not for raising money - for making connections. Unfortunately, this takes time...
I would suggest focusing on existing retail or multifamily where there is existing cash flow but a value add play versus new construction because of the length of time you are getting investors their returns. You should also get the word out to local attorneys, accountants, and others who may have clients interested in real estate opportunities. You never know!
This is a people business so you have to get out there and network and meet people. People work with others who they are comfortable with and trust. You should not only network to find your potential investors but also your potential partners. If you don't have a track record you need to see what you might be able to bring to someone that does that would make them willing to work with you in some capacity. In a sense you can borrow their track record but you have to make it worth their while, so figure out what that could be.
The short answer is, you don't. You need to invest your own (or friends and family) money first before strangers will invest with you.
A $3-6 million dollar deal for your first offering would have to be self-funded, I don't see another way around it.
@Account Closed You asked "If I am able to source deals through a sound brokerage network and am looking to get to deals of relative scale faster (raising between $1.5m to $2m in equity capital at an 8% hurdle), where is the best place to find people interested in investing in a new GP with limited to no "street credit"?
As an investor in these type of deals, i'd tell you that my email inbox is filled with the same brokerage network sending me deals.
My question to you would be what advantage you offer to me.
I'm fine with paying people for their skills, experience or network. But if you want people to invest with you for no particular advantage I'm not sure how to help with that. Show me you can make money and then we'll talk.