Being both a fund manager and a speaker on the topic of raising private money, I’m often asked where I find my investors for my business and Real Estate deals, especially the larger investments like my note business or commercial properties. Usually I give a rough answer of “networking and speaking” but today I did the math and finally broke down the numbers. Now before I get into the percentages, I must state that in my world, all my investors are accredited BUT that doesn’t always have to be the case. Some of you might be asking, “what does it mean to be accredited?” Well, there are multiple qualifications that all accredited investors must have, but the two biggest ones that help determine if you’re accredited or not are the following:
– All accredited investors must be high net worth individuals with yearly incomes of $200,000/year if they’re single, $300,000/year if they’re married
– Accredited investors must have $1 million in net assets not counting their primary residence, for the last two years, and expect to have that same situation for the next two upcoming years.
Like many people starting out, I didn’t know a lot of accredited investors and even with my current business I started with both accredited and unaccredited money, but there is a reason why I stick with only accredited investors today. While there are more unaccredited people to raise money from, accepting their money can be more of a hassle than you would think. Having unaccredited investors requires audited financials and more reporting requirements (so your legal work could cost more) and this takes a part of your funds. These things can be recuperated when factored into the funds that you raise but many times this is after the fact, so you could be paying for these things out of pocket.
Not to mention, one of the biggest difficulties when dealing with the unaccredited is that they’re more likely to need their money they’ve invested, so if anything goes wrong with the investment they could be taking a bigger hit than the average accredited investor. They also might be more eager to get their money back as well, so you’re ability to turn the money over and recycle it again could be limited. But of course that’s not always the case, and sometimes even your unaccredited grandmother can be invaluable to starting your first private placement. It also worth noting that you can have up to 35 unaccredited “sophisticated” investors in your first private placement, so don’t be discouraged just know the risks.
How to Purchase Real Estate With No (or Low) Money!
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.
Finding Private Investors: Breaking Down the Numbers
Looking at my current fund, I decided to dig deep and find where every accredited investor in the project actually came from. It’s been a few years now and although some folks have been paid back, I took a good look at my current list and here’s what I found:
46% of all investors are Referrals
3.5% of all investors are Friends
11% of all investors are Family
2% of all investors are found Online
37.5% of all investors come from Networking Groups (this includes speaking engagements and conferences I attend)
Also, I discovered that out all of these percentages over 30% of this capital came from self-directed IRA, 401Ks, HSAs, and Coverdale accounts. Retirement and certain savings accounts are a great resource for private capital that you may want to become well versed in. I mention it to all current and potential investors because many people have at least one of the types of accounts mentioned above, often times with money sitting idle (or at least getting sub-par returns) and they just haven’t met the right investment yet.
My Biggest Source of Private Money
I’m really glad I did this exercise because it points some things out to myself about where I should focus my time. The first thing that I noticed was that 60% of my capital came from friends, family, and referrals. So, I guess what they say about your “Network is your Net Worth” kind of thing holds true. A good friend of mine, who raises private capital for a living and lends private money, once told me years ago that the best source of private money is right in your cell phone. After looking at the percentages, I’ve come to realize that he’s absolutely right! So how did I get these people in my cell phone? Well I started small, by showing close friends and family how to make money in Real Estate – whether it was by buying properties together with family or even just giving financial books to friends, I’ve found being helpful to the people in your life will only come full circle. Prove that you’re educated and trustworthy and you’ll gain the confidence from your peers to invest, it’s that simple!
As for all referrals for new capital, I guess I can attribute that to doing the right thing, “doing what we say we’re going to do”, and having a great track record. So it really comes down to trust and credibility. We also have things in place to facilitate referrals, such as a “Referral Compensation Plan” and our “Customer for Life Program.” So the former is pretty self explanatory, since our business is notes we usually give note credits for all referrals and that’s based on a point system, but the Customer for Life Program is a little more complex. Basically we want to keep all of our investors for life, so we do whatever we can to facilitate a renewal, that includes: investor Q&A’s (both live and streaming online for out of state investors), company updates, easily accessible financials, frequent thank you/gifts, and streamlined note purchases – all documents are downloadable, etc. We also have an investor relations department whose major task is to just to stay in touch, and I myself personally try to call everyone in advance before their investment maturity date to discuss other possibilities and new opportunities our company offers. For those of you who have invested with funds and companies probably know, a Customer for Life program like this is a huge difference than what often times happens: you, the investor, gives somebody money and you hardly ever hear from that person again. Programs like these are usually how we recycle our money over again, saving us time raising capital and keeping our investors happy.
The Next Best Source
The second source of capital seems to come from networking. I can’t stress this enough, if you haven’t joined a group already DO IT NOW! Most major and minor cities have REIA chapters across the nation, and there are also Real Estate Meetup groups all over the country as well. Okay, but what if there really aren’t any? Or what if they aren’t very well run? Start your own! That’s what I did; I was one of the founders of a networking group of over 8,000 members in a five state region. But it didn’t start out that way. Years ago, I was in search of a group where I could discuss my deals and have others discuss there’s with me, not just a standard “exchange a business card” meeting or only a teaching seminar (that’s chosen by the group).
So I joined up with my lender, my insurance agent, and my accountant to form a group where we would try to bring as many people from our network as we could to lunchtime meetings where we could connect and discuss our business deals. We started out buying lunch for 8 people to eventually buying lunch for 45 people! Then the amount of people showing up was astounding that we had to charge for admission (the majority of which would cover the meal) and we eventually had to bud off and start groups throughout multiple cities. Now it took about 5 years to get to that point, but imagine all of the people I met along the way. Running the group not only gave me and my co-founders a lot of credibility, but running the group I was able to interview all the speakers we had and create bonds with people all over the country. This helped immensely when I started to expand my investments to other states and when I myself started to speak in other parts of the country.
I really think it’s more than just networking and expanding your network, it’s really about “relationship building,” which is why I always loved the lunch or dinner format – it’s not an elevator pitch, it’s a conversation. Like Ron Jaworski, former Philadelphia Eagles’ quarterback and owner of Philadelphia chapter of Business Clubs of America says, “You have to meet belly to belly with people.” You need to break bread, have a meal, and really get to know people. Besides some of the tips I mentioned, where do your investors come from?
Photo: Tyreke White