What's the difference between you and Sam Zell?

It’s no secret that the real estate market is at its worst since the great depression. It doesn’t help that most of the media seems to set their sights on publishing only articles that highlight the latest crash or the biggest loan scandal. Defaults are rising, foreclosures are at an all time high and Realtors are leaving their jobs to pursue careers in acting.

It’s not really as bad as it seems though. At least, not in the long run. Boom and bust cycles are nothing new, and thankfully there has always been a boom that followed a bust. In part due to the investors who sweep with the time tested strategy of “buy low…sell high.” The time has come to prepare for the next boom cycle, and those who can invest now will find great wealth in the near future.

You may be saying, “Thanks for the tip, Craig. Tell us something we don’t know. Problem is, we don’t have any money to invest. How do we do it.” Great question. Let’s start by discussing how not to do it.

How Not to Get Money to Invest

A simple search on BiggerPockets for the term “bulk reo” yields over 400 forum posts and articles about buying or flipping bulk reo portfolios. Go out further by searching “bulk reo” on Google and you’ll find just under a half million results. Take a moment and read a few of them and you’ll notice many newbie investors stating their plan is to go out and search for the mother lode of REO portfolios, buy them at four cents on the dollar and then wholesale them at twenty five cents on the dollar. They all plead for other people to invest with them stating if they could just pool some money they could go out and take over Citibank’s entire portfolio. Mostly, those posts go unanswered or just get ignored, the would-be investor tucks his tail and moves onto the next brilliant money making scheme. That’s a great example of how not to do it.

I don’t mean to pick entirely on newbie investors because there are many seasoned investors out there using the same strategy. We all understand the math of “buy low and sell high” but it begs the question:

How is it that Sam Zell, even during bankruptcy, can raise $600 million to buy property in this market when you can’t raise a dime? The answer: he’s got a plan and you don’t.

That is… until now!

You don’t need to read all the material printed by every guru to understand how to make an investment plan. Real estate investment is the same as any other type of investment. It all boils down to one simple truth; you’re in it to turn a profit. Everything comes back to that, and that’s exactly how you start your plan; by showing your potential investors how they will turn a profit by giving you their money. The more money you amass the more property you can buy and the further you can leverage your dollars.

I learned long ago that investing in real estate does take money — if not to buy property then certainly to manage it, and in cases when things turn bad, it often takes money to get out of it. This is even truer in the commercial world where financing is harder to come by and deals require even larger up-front cash outlays. That’s not to say that there isn’t a place for no-money-down deals and other transactions like assignments, bird-dogging, etc. There are many cases where deals have worked out wonderfully for people and I won’t say those deals don’t exist, because they do. I do think it is safe to say that no matter how you come by your property, having a little cash tucked away always makes the transaction go easier. It’s even better when that money is someone else’s and not your own.

This is the main reason I recommend that investors spend just as much time, if not more, looking for money or money partners as they spend looking for deals. Anyone is good for at least one home run deal in their lifetime. However, if you have money, you can turn every decent deal into a home run deal.

Look for that Money!

Before I start looking for deals I always look for the money. True, I do have an idea of the market and type of property I’d like to invest in, but I don’t waste time searching online, calling brokers, or looking for foreclosures. First, I concentrate on areas that fit my demographic criteria. When I find that market, I try to concentrate on a very specific type of property, mostly apartments, or mixed use apartment and retail. That way I can better understand the metrics of the market and the potential to make a profit there. This is the information that will populate my investment plan.

All my plans contain the same type of information. They explain my strategy for investment, the types of property we’re going after, and most importantly how much potential profit is in it for the investors. When starting out, you can do all your plans on a simple word processor, trying to keep them as neat as possible. When you find some success in your deals friends will tell friends how you showed them a great return and the money will come easier. At that point your proposals might get more extravagant and require the hand of an attorney or securities expert. Until then, stick to the basics.

All my basic plans have these items:

The Purpose – I start by telling people the market factors that I plan to take advantage of, what my goals are, and how we’re both going to profit.
Investment Amount – I tell people how much money I’m looking for, and from whom we’d like to receive it.
Investment Term – Here I list how long I will hold their money and when they can expect it to be returned to them.
Return on Investment – This is the key category; the one most investors skip to right away. Here I let the investor know how much money they stand to make if the investment goes as planned. If I called for different levels of investment I break down exactly how much each investor stands to profit. I usually put incentives in for those investors who give larger sums of money. That keeps the number of investors smaller and the number of voices on conference calls down. I also try to relate this investment to other popular investment vehicles of the day and show how my investment might stack up.
Investment Strategy – Here I give the potential investor a look into how I’m going to pull off what I say I can do. I tell them about the market conditions as they exist or will exist, and I tell them about how we will turn those market conditions into a profit making machine. You can list references to your previous success stories or those of others in this section. You want to give the investor the idea that you know what you’re talking about and you have confidence in your strategy. Just as a side note, if you don’t know what you’re talking about or have confidence in what you’re selling you shouldn’t be making a proposal. Take some time, do some research, and get back to the proposal later.
Market Location – I break down the market factors that affect the property type I’m planning to invest in. I put info here about the demographics I found while researching my market, and I list any studies that might have been done by competent people around me. If you’re soliciting investors from outside your market area you’ll need to make this section as informative as possible. Maybe include pictures, recent developments, barriers to entry, rental rates, etc.
Corporate Structure and Management – In these two sections I put information about myself and my partners doing the investment. I also attach a current resume showing the property I’ve had success with and how that relates to the property I’m asking them to invest in now.

I wrap up the plan with contact information and a website where the investor can receive timely updates on their money. Generally my investment plans range from 10-15 pages. Some are longer depending on the asset class in which I’m investing. They take an average of 30-60 days to do the research and put down on paper. Just about the time it would take to close one residential deal.

Take a moment and review the simple plan attached for an actual investment group started by me and my partner in Cornerstone. The plan you are looking at was sent only to family members and friends with whom we had good working relationships. With this simple nine page plan we were able to raise enough money to purchase two properties. We did this in under a year, and although we might have come up short on our ultimate target number, the properties are fully rented and performing as expected.

I’m positive that had I found the properties first and tried to get the money later it would have taken much longer and caused much more heartache. I would have had to convince my investors not only of my strategy, but also why that particular property was worth investing in. Not to mention, they would probably have fallen out of contract due to timing considerations. It sounds counter intuitive, but getting the money before the property works, I can assure you.

Communication, trust, and confidence is key. For instance, the current slump has caused us to modify our latest venture, which was similar to this plan. Refinancing our property is no longer a viable exit strategy. Neither is selling for the type of profit we thought would be there. We didn’t try to hide these facts, rather we accepted it and went back to our investors. They know the market has changed and they accepted the venture will take longer than we initially planned. Thankfully the current cash flow is enough to hold them for another year or so until the market turns around and we can pay them off at the level of profit originally planned. I have no doubt that our next venture will include some of the same investors.

Take your time in research. Fight the urge to make the numbers of every deal work just because you want to jump in and start investing now. If you really want to supercharge your investments, go out and find the money first.

Good luck.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.