I have listened to many podcasts that tell me that if you have a deal, then raising the money shouldn't be an issue. However, my client has a deal that I am helping him fund where he is offering 50% return on $1.5 Million over 2 years (Making 1.5 Million) and am not having a lot of interest to find one private lender.
That said, I am thinking about trying to raise money from multiple investors to raise the 1.5 million and offering the same terms. Any tips on the best way to do this? A crowd funding site? People with IRA money?
Lets say I would find 8-10 people that want to put money from their IRA's into a Self Directed IRA to fund this deal. Any legal issues I would need to worry about with the SEC?
Any tips for a beginner who wants to raise money would be much appreciated. Thanks!
A group I'm working with is closing on a multifamily syndication and here's a few things I learned.
1. You should start talking to potential investors way before you find a deal. If you have a deal under contract, its going to be difficult to raise money that quickly, especially if you're a beginner. with no track record.
2. Raising money from multiple investors through a SDIRA is a great idea but it will take time for your investors to open and fund a SDIRA account. (it can take up to several weeks).
3. There are SEC regulations that need to be followed when raising private money. You should contact a lawyer before starting. Here's a quick link with some info to get started. https://www.ppmfast.com/regulation-d-basics/
4. Crowdfunding is the route we took and it worked out great, however it does take time and not all crowdfunding companies have the same criteria, so you need time to evaluate them and for them to do the same.
Hope this helps!
How about some deal info? Usually when someone offers these terms there is a boat load of risk......either an over leveraged deal or some sort of pipe dream.
If the deal makes sense @Jay Hinrichs could probably help you out.
I am fairly certain that if you are looking to raise over $1000000 there are definite restrictions and advertising requirements and SEC Regs. if you are looking to raise 1 million or less there are certain exemptions
If the deal was that good raising $1.5M will not be a problem but what jumps out at me is someone offering 50% return. Been in this business 20 years and never have ever had anyone offer that type of return or even close to it.
Based on the returns being offered I would be extremely skeptical
@Austin Davis I hate to be the bearer of bad news, but whoever told you that “if you have a deal raising the money is no issue” has given you some very bad advice.
Raising money from outside investors is always difficult, even if you have a deal, and even if you have a good deal (or even a great one). The reason is people work very hard to accumulate wealth and they don’t part with it easily. When they do, they do so into an investment they trust, and especially in the case of real estate syndicates, with investment sponsors that they trust.
Before you have a deal, you must first have an audience that knows you and trusts you. For an early-stage sponsor, the best audience is your inner circle of family and friends because they (hopefully) already trust you. As you’ve done more deals, and carefully documented them and the results, your track record will speak for itself and will be a key element of establishing trust amongst investors that don’t already know you.
Once you’ve built that audience, you can find a deal and the funding will be no issue.
As to your client’s deal, if his forecast is predicting a 50% return over two years it’s very likely that either something was missed or the assumptions are overly aggressive. Most investors know this and immediately distrust the sponsor upon hearing a forecast like that unless your client can produce a track record of having delivered a similar return on previous deals that have gone full-cycle.
As far as legal issues, yes there are plenty. Raising money isn’t a do-it-yourself project, you need the advice and guidance of legal counsel that specializes in securities law. If you do this wrong you can be more than sued—you could go to jail, so be sure you follow your lawyer’s advice.
Although less strict that what is required of a public offering, raising capital for syndication or similar deals still requires the proper framework and legal documentation. On top of that, when money is raised for a real estate deal, it is technically classified as a security. Your client (the Sponsor) is also required to take reasonable steps to verify that investors are in fact accredited. All that being said, it is vital that you work with a securities attorney to make sure you CYA (cover your a$$) from every angle; as @Brian Burke stated, jail time is at stake.
@Brian Burke that line always cracks me up.. " have a great deal and the money will find you" or inference that all U need is a great deal and its no sweat to raise capital.. not in my experience . Maybe for some mom and pop JV type deals but not bigger projects.
@Jay Hinrichs Have you ever noticed that many of the people that say "Have a great deal and the money will find you" follow it up with "and for only $30,000 I will teach you how to find the great deals."
Then if the person buys that line they move on to "Wholesaling is easy."
@Thomas Castelli . Thanks for being the first to respond and for all of the valuable info! Sounds like we do need to be a little more careful with the SEC. I will try check out some crowd funding sites. Any suggestions on some reputable ones to start? Is there a guide crowd funding types?
@Wayne Brooks . Thanks for forwarding me Jay's name. I will reach out to him. More details on the deal are in my marketplace post (Link to Marketplae Post) . Since the post, my client has agreed to let someone fund the entire deal and is flexible to hear other proposed terms. He does have some paid for rental properties that he can do a cash out refinance on if needed, but would only offer the larger return on terms, but this would bring down the return he would offer.
@John Thedford Thanks for the insight. We will definitely get a lawyer involved if we want to pursue this.
@Chris Seveney This is great info to see what someone on the investor side would think. He is definitely a very thorough investor and wouldn't invest in something that didn't make sense. He came up with the high return based on how much money he had left over in his budget to pay an investor and thought a high return would be attractive. Interesting to hear that offering a lower return may have got him more traffic. :)
@Brian Burke This is great insight. I have just heard multiple times from guests on the BP podcasts that if you have a great deal, you should be able to raise money for it. I think having a track record, having a type of deal that people are familiar/comfortable investing in and selling the deal correctly helps quite a bit too. My client does have 25 years experience investing in long term holds and fix and flips, but maybe a hotel to assisted living community conversion is not something a lot of people are comfortable investing in quite yet. This is also the first time he has done a deal like this, so he doesn't have a track record for this specific type of deal, but does plan to do this same thing in many locations in the future, so that will come. We also obviously need to work on how to sell the deal too.
Great insight that offering a high return will immediately make people think that there is something wrong with the deal. If you have any advice on what attractive terms would be that wouldn't send any red flags up, I would appreciate that advice. My client has budgeted to pay a high return, but it sounds like he should keep more to put in his pocket or pay for the return in another way. Also, thanks for the advice on seeking legal counsel. Do you have any references that I could look into or should I just do a google search for Securities lawyers in Iowa?
@Michael Bishop Thanks for reinforcing the importance of seeking legal counsel. The "Jail Time" comment really helped enforce how serious this is. Definitely not worth it!
@Jay Hinrichs This is good info! Thanks for reinforcing some information and expanding on others.
@Michael Biggs Also good insight. I definitely don't want to be associated with a guru that is trying to rip people off with a get rich quick scheme. I will keep this in mind.
@Austin Davis the solution isn't to gate down the return to the investor by carving out more for yourself as the sponsor. The red flag isn't that you are offering too much to the investor, the red flag is that the projections are so rosy (which results in projecting too much to the investor). If you simply reduce the investor's participation in order to reduce the rate of return, you'll turn investors off because they see the sponsor getting too much of the action. It's an interesting push-pull that you have to manage.
Instead, a better approach is to gate down the expectations. For example, instead of projecting 5% rent growth, lower it to 2.5%, or instead of projecting a sale at a 5% cap rate, change it to 6%. Instead of projecting 95% economic occupancy, change it to 90%...you get the idea. These are just examples without knowing the specifics of your deal. I'm sure you can find ways to curb the enthusiasm.
Leaving the same investor split of the profits in conjunction with the more conservative assumptions will naturally lead to a lower (and more believable) projection of investor return. Plus it leaves plenty of room to outperform, which is the true key to building investor loyalty.
@Brian Burke Your last post was very helpful. It definitely makes a lot of sense to just be conservative in the numbers. It is always better to under promise and over preform for future business relationships. Thanks again for your input!
@Austin Davis - I am not sure how much I can add here, but I think you are on the right track. I would join as many MF groups and stay engaged on BP (as you are.)
The other thing to remember is that there are only two types of people 1. those in real estate and 2. those who want to be. So, in other words, everyone is a potential investor unless the following factors apply:
1. They don't have the money/liquidity.
2. They don't have the right attitude.
a.) bad attitude/overly litigious
b.) way too risk adverse.
Whatever the case is, please do get the proper paperwork - PPM, operating agreement, subscription agreement, etc. File the FORM Ds.
@Austin Davis We used a company called Realty Shares. I know Crowd Street and Realty Mogul are also pretty reputable. There are a handful of guides I saw on Amazon but never purchased one so I can't recommend any.
@Austin Davis you mentioned that you posted the deal on the marketplace. You may want to remove it if you mentioned that you're looking to raise money. Unless you have the right legal offering, that likely would be in violation with the SEC
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