Although I’ve been raising private money for over 10 years, I recently felt the need to check out what some other folks were doing in regards to raising capital for real estate deals. Sometimes, I think we all need to get back to the basics, whether that’s to verify that what we’re doing is correct or to see if it’s the best of what we can be doing. So, I signed up for Leonard Rosen’s “Pitbull Hard Money Conference” in Fort Lauderdale, Florida. Besides, it’s February in the Northeast, and we’ve had some pretty crappy weather. What a great excuse to get out of town.
For me, the conference was just what the doctor ordered. Set aside the fact that my wife and I got to enjoy a great venue on the beach, there was excellent networking, time to reconnect with old friends, and, most importantly, some really good content. Many of the folks in attendance, besides me, were already operating successful funds. One guy in particular, who appeared to be around 30 years old, had already raised over $100 million in the last four years. And, many more folks were ready to take the next steps to starting their own funds.
The information was so valuable, and it really centered on how to give investors exactly what they’re looking for. And honestly, that is the key. As Zig Ziglar said, “you can have everything in life you want if you will just help enough other people get what they want.”
The concepts are the same, whether you’re raising money for one property, or 100 houses. If you learn how others are raising private money and apply some of those ideas to your own business, it can make funding so much easier. Since I was able to grab many of these ideas and think about them in the context of my Note Business, I would like to pass them along for any of you to utilize as well.
How to Analyze a Real Estate Deal
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Here are a few things I learned about what investors are looking for today…
Security is more important than yield, although investors want both.
Although there are two types of money, regular and self-directed retirement money, people just need a safe, fair return. They enjoy income and monthly cash flow, but if they can get a conservative investment that’s backed by real estate, they’re set.
Showing investors the security that a fund offers largely has to do with the architecture of that fund. This includes everything from have the proper legal docs and filings in place and showing that to investors, to providing them with a fund review that paints a clear picture of the fund’s characteristics. Investors may want to see that you have a professional board of advisors, for example. This could consist of your banker, title person, appraiser, attorney, accountant, REO agent, etc. Rosen also mentioned that investors like to see a valid track record and management with actual skin in the game. Audited financials and transparency to the funds activities goes a long way too. In essence, investors may feel more comfortable when they can invest with an organized and professional enterprise.
Investors invest in the relationship, not the investment.
Of course the type of investment, itself, is very important. It is correct that you need to have a viable investment or no one in their right mind is going to invest with you. That being said, when there are thousands of people or companies doing the same type of business, why would someone invest with you or with your company? It really comes down to trust and integrity, as well as the reputation of the company and the management team.
One of the best ways to build a relationship and show your trustworthiness is through proper communication. For example, as an investor, would you feel more comfortable investing with someone long-term if they communicate with you regarding their business goals and any new strategy changes? Probably, right? Proper communication can be accomplished in several ways. It could be anything from providing financials, investor packages, and monthly statements, to making phone calls to investors about the fund’s newest strategies or utilizing a website to validate what the fund is all about. Investor’s like to know the management’s background and experience level. They may also like to hear testimonials and positive referrals coming from others, as a form of validation. Maybe they want to be reminded of the benefits of investing in this particular fund, whether it’s your conservative underwriting or the quality of the collateral that accompanies the consistent yield offered by your fund. It never hurts to give an investor a call, invite him/her to lunch, or host investor events. If they’re consistently being paid, just keeping them informed of new, upcoming opportunities is reason enough to stay top of mind when the investor is thinking about his/her portfolio.
Even if you’re only raising money for one deal, building a relationship with the investor means that you can go back to them with future deals.
Investors want access to deals they couldn’t normally get.
This statement is so true. Many people just don’t have the skills, or time required, to go find good deals to invest in. Many folks just don’t have experience raising capital or being the bank, either. Or, some people just don’t have an interest in finding or managing real estate deals. That being said, they might want to participate in a safe, high yield investment backed by real estate. If you’re running a fund, you would be giving investors the opportunity to participate in commercial and residential investing and finance.
To show investors that you would have this opportunity or access, you can provide them with sample deals from your past portfolio, such as deals you’ve partnered on or deals you’ve sold to other investors. Then, you can show investors the opportunity that exists with similar deals in the market. Or, by giving the investors a clear picture of how the fund operates and the experience level of fund manager(s), or board of advisors, they may realize that it’s a lucrative opportunity to invest with people well-versed in the business.
As Leonard Rosen said, “90% of raising capital is showing up.” Basically, do you do what you say you’re going to do? If you can clearly demonstrate what you’ve done in the past and what you’re successfully doing today, then it’s much easier for investors to buy into your plans for the future.
Now, all you have to do to get more investors is to become more well-known in the community…the rest is easy.
So, I’m curious, what are some of you on BiggerPockets doing in regards to raising capital for real estate deals? Maybe you have some fresh ideas to share. Or, have any of you taken similar ideas and adapted them to fit your own plans or your business model?