Two words that send quivers down most real estate investors’ spines. Now add to that the need to raise money from third party investors and you have the perfect “fear storm.”
The fear storm causes most real estate investors to feel overwhelmed with SEC, Securities Law, Blue Sky Rules, Meetings/Luncheons….and feel like waves of raising private money are crashing on top of them.
First thing, close your eyes and breathe. I want to teach you to surf these waves through a simple three step system:
Step I- Finding Third Party Investors (List Building)
Step II- Reaching Them (Marketing to Them)
Step III- Presenting to Them (Drafting a presentation to build credibility
This article will focus on the first step of Finding Third Party Capital Investors – with the intent of helping you build a list of potential and prospective third party capital investors.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Step I- Finding Third Circle Investors
I glanced over ideas on how to find private money lenders from the Third Party circle in my previous article Private Money Lenders: Who They Are & How to Find Them. Now I want to provide more detailed and practical advice on how to find these investors.
Disclaimer: You need to follow SEC rules on raising private money from third party investors. I found a good Biggerpocket Article that address the legal issues and provides tips on raising money from capital investors: How to Raise Money for your Real Estate Investment by Clint Coons, though more recently, there have been some changes following the Jobs Act Amendments to the Regulation D advertising rules. You can read more about those changes here: SEC Website
My Article Disclosure: There is no magic directory or website that will supply you with ready, willing and able capital investors. Rather, raising money (like finding deals) is a blend of marketing and persistence. This may change once the Jobs Act rules relating to Crowdfunding are released to the public and take effect (Check out this WSJ article for more information on that.) Until then I will show you an old school way.
Building Your List of Private Money Lenders
The first thing you need to do is to build a list of potential capital lending prospects investors. “Easier said than done,” you must be thinking. Yes this is difficult – but it is doable as I was able to do it so you can too (Trust me – I am not necessarily the sharpest knife in the drawer). There are two ways to build this list in my experience:
A.) List Brokers:
A list broker acts as an agent for those who wish to conduct direct marketing campaigns via direct mail, email or telemarketing. List brokers provide lists that, minimally, contain a prospect’s name and contact information. There are many list brokers out in cyberspace that you can find with a simple google search, such as Click2Mail.com. Here are the steps you need to take to build a list of “potential” capital investors:
- Area: Decide which areas or cities that you want to target to compile a list of prospective capital investors. This can be done in a variety of ways. You can pick your entire state as you target area or the cities closet to your investment area.
- Filter Criteria: Once you have identified the areas then comes the step of picking filter categories. The categories if picked correctly will allow you to a build list that has a higher propensity of being interested in lending money to local real estate investment projects. This step where list building becomes more an art than a science as the filter categories are large and varied so pick yours wisely. The best general advice that I can provide is “Be a Capital Investor” what I mean is think like a capital investor in terms of how much money would you want in your bank account before you started investing, what would be your interests i.e. cigars, wines, boats etc, would you be already investing in the stock market or other investment categories etc. This though exercise will help you come up good filter criteria so that you list would be more relevant and targeted.
- Median Household Income (Greater than $90,000)
- Invested in Stocks or other investment products (Yes)
- Owns a Personal Residence (Yes)
- Has Individual Retirement Account (Yes)
- Responsiveness to Direct Mail (Medium to high)
Ankit Recommendation: You can utilize Census.gov, City-Data.com, or Bureau of Labor Statistics to do a quick search for the highest median household income towns relative to your state median income and pick those towns as your target areas.
B.) County Records:
Searching county records is like being a Real Estate Detective as you are trying to find a needle in a hay stack; the needle being “Prospective” capital investors. What are you looking for? That is the first question I had when I started doing this. There are two subsequent question that arise from overall question of what are you looking for?
- What document should you be researching? Some investors think it’s the deed – rather, you will have to go through Mortgage Document records. You can do this research either from your home computer if your county is online or physically at the county recorders office. In the State of New Jersey, there is a website that lists which counties are online and which are not.
- What should you be searching for within the Mortgage document? You are looking for the Grantee line (Mortgage Provider.) Your mission (if you choose to accept it) is to find Grantee lines that either have a personal name or a corporate entity name that is not a bank (i.e. you don’t want Wells Fargo, Bank of America, Chase, Valley National etc. or a national servicing company like Ocwen, Saxons etc.) You simply want a no-name LLC like 32 Main St LLC. The reason you want it to be either a personal name or a no-name LLC is because these are private lending individuals/ firms that have already lent money in your state or investment area (Ankit Time Saving Tip: If you want capital investors that already know your investment area then search for mortgage records that is within your investment area as this makes it a easier to find capital investors that are more familiar with your area and there is no less hurdle to have them invest into your deal) and they will be more to lend more money in that area if you have a good deal.
The county record way of list building can be both time consuming and frustrating as it takes a long time to search through the records and you run into more dead ends than private lender records. However, this activity provides the best yielding list of “prospective” capital investors in my personal opinion as these lenders have already done two things: (1) Lent money on local real estate investments and (2) lent money within your state or investment area.
Bonus Offer: I know that searching county records is frustrating so over my last 5 years as a real estate investment director I have found a way to cut down your search time at the county records so that you can more quickly find potential capital investors. It is not perfect but its a decent shortcut. However I cannot just give away that shortcut without something back from the readers. To get this bonus I simply want you to read and share this article with your friends, family and other fellow investors and once this article either reaches 100 tweets or 25 comments then I will share the shortcut below! 😉
The next step of this system is reaching this list of “potential” & “prospective” capital investors that you have complied followed by presenting to them to establish credibility. How to approach them and how to be successfully across the following two steps we will cover next time. (Cliff Hanger Ending…..I know I hate those as well but I want you to tune in next week same Bat-time, same Bat-channel)
Until then, I would love to hear your ideas on compiling a list of potential capital investors along with any questions that you may have; Leave your thoughts in the comments section below.