Anatomy of the Catch 22: How “Keeping it Real” Both Helps and Hurts You as You Raise Capital for Your Business

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Investor General’s Warning: The contents of this article may stunt your growth. Side effects include sleeping well at night, the ability to look at yourself in the mirror in the morning, and longevity in business.

Raising money isn’t easy. Why make it harder than it needs to be? Because your long term success depends on it, that’s why. You might have heard me tell part of this story on the BiggerPockets podcast. Recently I was conducting an investor presentation for a multi-family office. No, not an office in an apartment complex, but a financial advisor that makes investment allocations for ultra-high net worth families.

I commented to the advisor that raising capital is one of the most difficult parts of what I do. He said to me, “do you know why that is? It’s because you don’t overpromise.” It’s such a simple comment, but so very, very important. Let’s explore why.

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How to Raise Capital by Keeping It Real

Over ten years ago when I decided to leave part time real estate investing behind and go full time, I put a small investment fund together with a couple dozen investors. After all these years, these investors are still with me. I believe that a major reason for this is that I didn’t oversell the opportunity. I like to under promise, and over deliver. When you have capital partners, you will have to talk to them on a regular basis to update them on current events and performance. If the investment is doing better than you promised, your investors will think you’re a hero. If it does worse than you promised, you’re a bum. No one wants to be a bum.

When I started my first fund, I explained it to my investors this way: “The unlikely worst case scenario is you could lose money, my goal is to earn you a 10% return, and if all goes well you’ll do slightly better than that.” You notice that nowhere in this explanation did I promise any specific rate of return. I knew all along that the returns would probably be closer to the 12 to 15% range, but what if I told them that and only produced 10%? They’d be disappointed and would probably have left to invest somewhere else. Instead, I told them the risks, I told them my goals, now it was up to them to decide if the risk was worth the reward.

The end result was my investors in this one particular fund averaged 18% annually over the last ten years, despite some pretty wild market cycles during that time. Not a bad return, and definitely above what they were told to expect. When they compare their actual results to what they were expecting, do you think they were thrilled or upset? In your deal, the way that question will be answered is entirely within your control. For example, if I had promised 30% returns, they’d have pulled their money out a long time ago. The difference was simply managing their expectations. Sure, it is easier to recruit an investor with the promise of high returns. But it is very difficult to retain an investor unless you achieve the benchmarks that you set for the deal at the outset.

Resist the Temptation when Raising Capital

Some new—and seasoned—real estate investors are tempted to overstate the potential of their deal so they can raise capital. Resist the temptation. Here are just a few tips on producing conservative projections for a typical buy/hold deal:

  • Overestimate the vacancy rate. If the average for the property type and age class in the same area is 6%, use 7% in your projections (or even 8%).
  • Overestimate the exit cap rate. If properties are selling at a 7% cap rate, why not use 7.5% for your exit valuation? If interest rates rise, cap rates are likely to rise also, better to be safe than sorry.
  • Pad the expenses. Put a little extra in each expense category, you may or may not spend what you project, but better to have a cushion.
  • Underestimate rent growth. Projections aren’t always right. If the market reports forecast 5% rent growth, and you forecast 3%, your investment will outperform if the market reports turn out to be right.

If you follow this advice, you might think that it will be harder to find investors for your deal because the returns will be too low. If that’s the case, maybe this isn’t the right deal. Remember that it is more profitable to invest in good deals than just any deal (Tweet This Quote!)

If you want to keep your investors for the long term, start by recruiting the right investors. Attract the ones that expect a return aligned with the opportunity. If you promise 30% returns, you might have an easier time raising capital (if you’re even believable), but when that deal only delivers 20%, your investors will be dissatisfied and you’ll have to raise money all over again. If you use very conservative projections for performance, your investors will be very happy when the return you deliver exceeds their expectations. They’ll invest with you again and again (and maybe even tell a friend), and that means less time spent raising capital on the next deal.

Do you raise capital? Do you over or under promise? Let me know in the comments below.
Photo: Adhi Rachdian

About Author

Brian Burke

Brian Burke, CEO of Praxis Capital, has raised over $80 million from accredited investors and family offices during his 25+ year real estate investing career. His focus is on residential real estate but has also done development, self storage, and commercial deals. Brian has completed more than 500 single family flips and has acquired over 2,000 residential rental units comprised of large apartment complexes all the way down to single-family homes.


  1. Brandon Turner

    Brian this was a terrific article! If there is one thing I want to know more about with investing its raising capital – cause I believe its the only way I can take my business to the “next level.” Your advice is great and an important reminder. I think I’m often guilty of being too-optimistic, but it’s far better to under-promise and over-deliver. Thanks for the reminder!

    • Thanks Brandon! Raising capital is critical to a successful growth strategy. It’s also the weakest skill set for most real estate operators. Interestingly, the people that are best at raising capital aren’t always the best real estate operators. There’s one more “Catch-22” for you!

  2. Great article. I have found that once you raise private money it is all about managing expectations. I 100% agree that you set a very achievable expectation that you can shatter and also communicate worst case scenarios. Thanks for sharing Brian, best of luck in the future!

    • Thanks Ryan! I’ve found that setting realistic expectations at the outset may make it harder to get the investors at first, but it sure makes it easier once the investment is up and running. And, the “up and running” phase lasts a lot longer than the “investor recruitment” phase.

  3. Another great article Brian. I know if there’s one thing at the top of every investors list, it is raising capital. I also know that as investors, one of the biggest hurdles we face is dealing with the over promising of someones past investors! Thanks for giving everyone the heads up.

    • You’re right, Karen. One reason that this strategy is hard is because it almost seems that capital partners expect you to lie to them. When you under-promise, they still may not believe you, but it is more important to keep your integrity than “play the game” by inflating your projections to create the bait. Your reputation depends on it.

  4. Brian,

    Diddo the great article comments. If everyone under-promised and over-delivered it would probably be a lot easier to raise funds.

    Similar to your article, my business depends on fund raising as well, and it’s not the easiest at times. I have “high” risk investments (mobile homes) thus offering higher returns, and completely agree that managing expectations is a BIG cog in that wheel.

    Would you have a quick summarized response as to the benefits of starting a fund or be able to write another article regarding such; benefits and or a summarized how-to and logistics of such an undertaking? Hopefully that’s not overstepping or over-asking; looking 100% for private money leads down some dead end roads. The ability to offer something of the “fund capacity” could be a game changer. Thank you for your time and the article submission.

    • Good idea for an article, Sam! A simple answer in the interim: There are many benefits to starting a fund, not the least of which is total certainty that you can complete any deal that you start without worry of failing to raise the funds. The major downside, however, is that raising money for a fund is exponentially more challenging than raising money for an identified investment. Track record is the key to success here.

  5. Brian,

    Great article and for me it is very timely as I’m raising private capital for the first time.

    There are so many investment scams out there nowadays that I’ve found it easier to simply lay out all the risks from the beginning as well as offering realistic rates of return. One investor that made the jump with me said he pulled the trigger because I thoroughly laid out all the downsides and the risks whereas others downplay them or worse pretend that there are none.

    I’ve also found that by fully explaining the numbers and being able to show where all the built in contingencies and padding are, potential investors can feel better about investing with me and the deal itself.

    Thanks again for the article!


  6. Brian,

    I enjoyed the article AND the podcast discussing this topic. I knew I had the same person when I saw the phrase that you did not “over-promise a return”. That struck me on the podcast and does in print. Amazing how investments get a bad rap from people over-promising a return. Might as well be a used car salesperson and throw mud at the wall to see what sticks when selling if over-promising is all you have in your bag!

    Raising money looks like fun, I plan to do it this year for a pool of small donors, maybe the first meeting brings in $10k, another might bring in $50k, I am ok with hitting singles and doubles, because practice makes perfect, and when CDs are earning less than 1%, even on a 10-year note, why not invest in something that can return a nice chunk of money and be tied to a safe and secure asset.

    Of course, when my taxi cab driver is educating me on the ease of raising money, I’ll know its time to get out! HAHA!


    • Great comments, jack. A lot of sponsors use the “throw mud at the wall” approach, the problem is that it leaves behind a muddy mess and at some point they can never dig themselves out of the sludge. For those of us that have been in this business for a while, and plan to be in it for a long while longer, the “keep it real” approach works best. When I built my first fund, I took investments as small as $5,000. My minimum now is $100K. Time sure changes things…

      Good luck on your deal!

  7. Your ideas are spot. I think that adding padding everywhere to plan for the worst case scenario makes the deals themselves easier to sell to investors. I sometimes even begin with the worst case scenario to reduce their fear of risk, then present the best case scenario. If they can take the worst case, then if and when the best case comes through, you have truly underpromised and overdelivered. Plus, I never think of raising money as a pitch, its really presenting opportunity – an opportunity versus other investments they may already have. Good article, Brian. Mike

  8. Jeff Brown

    Stellar, Brian. One of the most common thoughts voiced to me by folks I chat with is that they get the answers to their questions, good, bad, or ugly. Sometimes they answers they don’t like to questions they never asked. 🙂 Again, good stuff.

  9. Hi Brian,

    Great information and very well written!

    I have a question and maybe an idea for another article. I’m somebody who has never raised any private money before and I would really like to know how you structure your deals.

    Are your investors funding your flips or buy and holds?

    I always thought that there were two basic types of investor partnerships, debt partners and equity partners. I guess my question is do you use both of these types and if so, how do you structure them?

    You said a couple times that you under promise and over deliver with a return better than what your investors were expecting. I was under the assumption that if you set up a debt partnership, the investor knows before hand the return they will be getting on their money in the deal. Much like a second mortgage on the property. How can their rate of return increase if the deal turns out to be better than expected?

    I hope all of this makes sense. I’m just kind of confused as to how you structure deals and how the rate of return for your investors changes.

    Thanks so much!

    • Hi Nick, good idea for an article! A short-version answer:

      Everything I do is primarily funded by investors in some capacity, flips, holds, single family, multifamily.

      You are right about two types of investors, equity and debt, and I use both. I use debt to leverage the equity I have for flips, and use equity for holds (leveraged by banks). For single family, I have investment funds for flips and holds (different funds for different disciplines). For multifamily, I use a separate partnership for each property with equity investors in each.

      In the event of debt, the interest rate is the agreed-upon rate and the investor receives nothing more and nothing less. This article is more directed at the equity investor side. Equity investors don’t get a quoted interest rate, they get a split of the profits and in some cases a minimum threshold or preferred return. Regardless of the structure, equity investors will always be interested in the sponsor’s projections for performance, and here is where you have the opportunity to under-promise and over-deliver.

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