If you’ve been investing in real estate for a while, chances are you have considered using private money lenders (investors) to grow your business. Most people fail when reaching out to potential investors because they don’t answer the five critical questions that every private lender must have answered before investing with you (even if they don’t ask them). If you can answer these five questions, you will dramatically increase your fundraising ability. By putting yourself in the shoes of the potential investors and knowing what they are asking when you approach them, you will help to position your offering in a way that greatly increases your odds of acquiring private money to grow your business.
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One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
5 Questions You Better Be Able to Answer Before Private Money Lenders will Invest in You and Your Real Estate Deals
“Am I going to get my money back?”
This is the number one question that private lenders want to know when approached. If they do not feel like they can trust you enough to know that they will get their money back, they will never invest with you. Essentially they are asking themselves if they trust you to do what you say you are going to do.
Investors invest with people they know, like, and trust. Potential investors have all heard the horror stories; at this point they are judging your ability to deliver, and they will not likely give you money until they deem that you’re trustworthy.
“What’s in it for me?”
If you have established trust, the next thing potential investors want to know is how they will benefit. Many people approach potential lenders with the wrong mindset, and tell them all about what the lender’s money will do to help their business. However, investors are concerned about what is in it for them, and you must address that up front.
“What are my risks?”
Every investment has risks and private lenders want to know, if things go badly what is their downside? Will they lose all the money they invested, or just part of it? Is there a chance they could risk even more than they put into that investment? A realistic investor knows that there are things that could affect any real estate investment’s outcome.
They want to know if you understand them and are prepared, and that you have done everything you can to limit their risks. They want to know that you are realistic with your projections, and that they aren’t going to get hung out to dry when you encounter difficulties.
“How is my investment secured?”
If you are investing in single-family homes, is the investment secured by a first position on the mortgage, title insurance, and hazard insurance? If it is an equity partnership, how is it secured? Is it protected by the cash flow it generates, by hazard insurance, etc.?
“Do you have a plan and is it realistic?”
Before potential investors will invest with you, they want to know if you have a plan, if you’ve done this before, and have you thought it through or are you flying by the seat of your pants with their money? You must have a plan and it must be written down. You might think this is a “no-brainer” and that everyone has a plan before they approach potential lenders. However, I’ve seen it over and over again: people approach potential investors and they have a vision, but lack a step by step plan for achieving their investment goals.
They want to know that you’ve done this type of investment before or if they are going to be a part of a new experiment. This can be one of the biggest hurdles for new investors to overcome. But if you can show experience on your team (notice I didn’t say it had to be you alone) and have a written down, well thought out plan, you will greatly increase your odds of them investing with you.
If you do not answer these five essential questions when talking to a potential investor, they will not invest with you. However, knowing their concerns and answering them up front will greatly increase your odds of acquiring them as an investment partner, thus growing your business faster. The key to raising great amounts of private money lies in addressing potential investor questions before they are asked, having a realistic plan, doing what you say you will, and being amiable.