Raising money from strangers is not so simple, especially when you have to deal with SEC guidelines and a real estate market that has brought about countless negative media headlines. Despite the negative headlines, the real estate market is ripe with incredible deals — deals so good we will be talking about them for decades.
Raising funds for these deals however is the biggest challenge for many investors. Banks are extremely tight and cash is king; sellers flat out want cash. Now, raising private money is not as simple as just asking family, friends and contacts. You have to engage strangers and somehow convince them to start writing checks and wire money all while not violating SEC guidelines. It absolutely can be done and is being done by thousands of investors. Many struggle and make a lot of mistakes.
Here are solutions to the most common mistakes when raising private money.
- Do not give up – Your success in raising private money does not hinge on your first try. In fact, it may take 20, 100, maybe even 1000 times until you get a Yes. Everything can snow ball in a positive direction after that first Yes. Never give up and that next attempt could be the one that starts your lift off. Mistake #1 is giving up too soon.
- Build credibility and a track record – For most it simply comes down to trust. Investors will step to the plate if they trust their money is going to be safe. To build trust, investors must find you credible; you must build credibility. If you don’t have a track record like most beginners, then partner with someone who does such as a mentor or an expert in your area. Do this ethically, do not just steal their track record; make it a win-win and build your own track record. Mistake #2 is the failure to establish credibility and a track record.
- Get them to come to you – What do you think of door to door salesman? Especially when they sell items you don’t need? Chasing private investors is like desperate begging. The key is to get them to come to you. Give out free information, use your track record and teasers to get them to come to you. Mistake #3 is desperate chasing and begging.
- Prospect potential investors – You are not borrowing money, you are offering a tremendous opportunity for investors to make a great return on their money. It is a privilege to be your private investor. It is as much about your investors’ being a good fit as it is you and your deals being a good fit for their money. You must ask them prospecting questions. Find out their experience in order to confirm they are comfortable with investments backed by real estate. Make them show proof of funds, find out their expected return, timeframe and what due diligence they need to make a decision. Always prospect potential investors to make sure they are a fit. Mistake #4 is not prospecting potential investors which results in a lot of wasted time.
- Make them commit – People flake. It happens all the time especially when it comes to money. They say they will fund but they suddenly have questions and objections at the last minute that they clearly should have brought up a long time ago. This can easily be avoided. All investors must put up money before close, in fact at the beginning of the process. Earnest money, inspection fees, entity creation, or a reserves deposit are all ways they can show commitment long before close. Mistake #5 is waiting until close to find out that an investor is not committed.
There are many benefits to buying with cash. You can get big discounts, buy fast and do deals not possible with conventional financing. Cash is king and there is a lot of cash out there. Money does not disappear, it just changes hands and right now a lot is sitting on the sidelines. Stay persistent and implement these 5 solutions. Raising private money could be the key to a successful real estate investing business for years to come.