Raising Capital in a Fearful Market
Hi!
What would be your best advise for raising capital toward real estate projects in this market of extreme fear and rising interest rates?
I feel like the 99% of investors fears are valid, however, I don't really believe in a "do nothing or wait it out plan"
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First you need to get past the 'extreme fear' concept. That's all in one's mind. A market like this can create opportunities for those willing to stay in and take a risk......frankly, this market will scare away many newbies and looky-loos, leaving more deals for serious investors.
Nice post @Blake Pieroni, I agree with @Bruce Woodruff. In addition, having a calculated plan and doing your due diligence. Not doing a deal just to do deal but staying disciplined is important but not letting fear highjack your decision-making abilities.
The stock market has been experiencing a ton of pain YTD but I wouldn't consider there to be any fear in the real estate market, let alone extreme fear.
Rising interest rates will inevitably slow appreciation, but it's anybody's guess as to whether or not this time will lead to a correction or a crash.
All I can speak to is my own local market, but raising capital is not a problem right now. There is way more money waiting to be deployed than there are deals available. And I don't see that changing anytime in the near future.
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Quote from @Scott E.:
The stock market has been experiencing a ton of pain YTD but I wouldn't consider there to be any fear in the real estate market, let alone extreme fear.
Rising interest rates will inevitably slow appreciation, but it's anybody's guess as to whether or not this time will lead to a correction or a crash.
All I can speak to is my own local market, but raising capital is not a problem right now. There is way more money waiting to be deployed than there are deals available. And I don't see that changing anytime in the near future.
This^^^ And I'm not even sure that these approaching high-inflation times will slow appreciation across the board. The REI business has always been a case-by-case type of business and now it is more important than ever to be a smart investor.
Quote from @Bruce Woodruff:He’s talking about appreciation at a macro level. I believe this to be true as well or put another way, highly likely. However, appreciation even if it slows will be different (aka more or less) depending on the market. I think every investor understands this at this point. It’s like someone saying there is currently “high inflation“. I intuitively know that they’re speaking from the macro level, however one could argue that there are several areas that aren’t experiencing “high inflation“.
Quote from @Scott E.:
The stock market has been experiencing a ton of pain YTD but I wouldn't consider there to be any fear in the real estate market, let alone extreme fear.
Rising interest rates will inevitably slow appreciation, but it's anybody's guess as to whether or not this time will lead to a correction or a crash.
All I can speak to is my own local market, but raising capital is not a problem right now. There is way more money waiting to be deployed than there are deals available. And I don't see that changing anytime in the near future.
This^^^ And I'm not even sure that these approaching high-inflation times will slow appreciation across the board. The REI business has always been a case-by-case type of business and now it is more important than ever to be a smart investor.
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I recommend catering to sophisticated investors who will be there during all market conditions (and will still have deep pockets when there is blood in the streets). The retail investor may settle for bad investor splits/terms, investor take-outs at refinance, no offering memorandum in advance of the webcast, no sensitivity tables in the offering materials, no rent comps, aggressive underwriting, and aggressive sales pitches but those investors will run for cover during market corrections, right when opportunity strikes.
Thank you!
@Blake Pieroni It's risk mitigation. The far greater risk at the moment for those with capital is to sit tight. Double digit inflation and devaluation of the dollar is the biggest risk. Investing in real assets and commodities on the other hand are a much better choice.
It is always about capital preservation for those with capital. Not talking about the first time investor here, but rather the large investor looking to preserve capital and seeking tax deferral or shelter.
Quote from @Chris Levarek:
@Blake Pieroni It's risk mitigation. The far greater risk at the moment for those with capital is to sit tight. Double digit inflation and devaluation of the dollar is the biggest risk. Investing in real assets and commodities on the other hand are a much better choice.
It is always about capital preservation for those with capital. Not talking about the first time investor here, but rather the large investor looking to preserve capital and seeking tax deferral or shelter.
@Chris Levarek, excellent point about the value of capital preservation. However, I’m sure that the vast majority of BP members are smaller investors 0-3 units and are trying to build wealth and not preserve it. Those accredited investors with high net worth and with $200K+ to invest may be benefit more than others from syndications or JVs to avoid losing $ to inflation. Also, high net worth folks will likely pay closer attention to investments that offer more beneficial tax benefits because they literally have more to lose.
True, but the question is on raising capital. So I guess what I'm saying is, understand who you trying to raise capital from. If the end product does not focus on capital preservation at this point in the market cycle, I think you are doing a disservice to your investor base.
Now, there a plenty of strategies focused on building wealth but if you want to risk investor capital from newer investors in that area at this stage, you had better know what you are doing. BRRRR's, Flips, Development, are getting slimmer on margin unless you know what you are doing...
Who is fearful?
The wealthiest real estate investors that I know are not fearful, at all. They are all still buying.
You raise capital the same way you raised it really at any other time. You present the right deal...
If you are asking an investor to invest in a project, then clearly they are savvy enough to know the risk involved. It's not like you're asking your uncle bob that has never done a deal in his life to suddenly start investing.
Banks are still lending. Capital is still hungry for a return.
Everyone keeps mentioning demand slowing down due to interest rates rising, but no one is mentioning the larger issue at hand. WE HAVE NO SUPPLY!!!!!!
I am turning and burning. Ready to double down and buy more deals. Stick with your fundamentals. Have a precise criteria and a business plan. As long as you are in it long term you will be fine.
Shehzad
I agree with you. Waiting it out certainly isn't the right plan, in my opinion.
This is more of a sales question: how do you demonstrate value to alleviate investors' problems and fears? You already identified their problems, so how can you help? That depends on your offering, but most cash-flowing real estate has a huge capital preservation benefit during inflationary economic cycles (bc of the ability to raise rents), and if you're in residential then the rising rates will create more renters.
Some will always find a reason not to invest. It's not always a good fit, and that's okay. Find partners who understand the value of your project.
Hi @Blake Pieroni. Great question. Real estate shines in times of market uncertainty. Not always of course. But as was stated above, the very best opportunities are in times when there is blood running in the streets. Warren Buffett, Howard Marks, Charlie Munger, et al, and others, constantly affirm this. I recommend getting two Howard Marks’ books that speak to the subject in detail and then forming your own message around some of these principles. The first book is The Most Important Thing and the second book is Mastering the Market Cycle. If you are choosing, one I would choose the latter. While we know that real estate shines at times like these it is very hard to get the average investor to see that, so you are right in asking this question. Good luck!
