Raising Capital in a 'Down' Economy

It's no surprise that the average American doesn't feel very good about real estate right now. After all, we've seen median home prices drop approximately 44% nationally since Q3 2007. (You can even check out the data for yourself here.)

Because of this, it may be tempting for real estate investors to head for the hills and defer raising private money until the "economy comes back." That would be a huge mistake. You see, the best time to get in is when most other people think it's no good. Call it contrarian investing, call it going against the grain, call it whatever you want. The way to get bargains is to pick up assets that others have discarded as being worth less than their true value.

You can (and should) profit more in 'down' economic times than when GDP is growing at 3%-4% annual rates.

In order to maximize profits and

take advantage of the available opportunities - in foreclosures, short sales, discounted notes - you should raise private money to fund the deals. Private money allows you to pay cash, move quickly and, in many cases will be your only choice of financing, as banks and other traditional lenders are still sitting on the sidelines.

Private money (money invested by individuals) is going to be your best source of investment funding. But this may be counter to conventional wisdom, which dictates that people will hide their money under the mattress when times get tough.

There's an argument to be had that the general public is less inclined to invest when their disposable incomes are lower, but that's not reason to fold up your tent and put your private money goals on the back burner.

One of the most important things to remember is that, even in spite of a down economy, there are still plenty of people (high net worth and otherwise) who are looking for a good home for their investment dollars. Getting scorched by a stock market that went from 14,000 to 7,000 in a matter of months (e.g. the Dow Jones Average) doesn't make for a restful night sleep. Simply giving investors an viable alternative to the financial services industry will give you plenty of ammo. Often, one of the biggest obstacles you'll face in raising capital is lack of awareness that your investment opportunity exists.

Another great way to raise capital in a 'down economy' is to show your investors how placing funds with you can help them earn back the money they may have lost in other assets, even their own home. When someone pushes back from investing with you for the reason that their own home dropped in value (e.g. "therefore, why should I invest more money into real estate?") you can point out to them that they can dollar cost average and make up their losses in a faster period of time.

For instance, if your private investors home was worth $400,000 in 2007, and is estimated to be worth $325,000 now, you can place their funds in a similar asset (say, an investment house for $100,000 that is worth $175,000 when fully rehabbed) and, by paying a rate of return between 10% and 12%, they will double their investment with you in 5-7 years. With you they can "get back and get even" with the market and make themselves whole again. Not a bad proposition for most people.

Remember the Warren Buffett axiom:

"Be greedy when others are fearful and be fearful when others are greedy"

There's still a lot of fear in real estate right now, so...what should you be? Fearful or Greedy?