8 of the Best Ways to Raise Capital for Your Investments

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In our last conversation on raising capital, we were discussing Investor Relations and the importance of staying in communication with investors, before, during and after the fundraising stage.

Now, I want to go over some of the advantages of using a Private Placement Memorandum (PPM) and, more importantly, some of the best ways to raise money.

Keep in mind that I started raising money in a very small way at first. No one would give me a dime in the beginning. I was a newly self-employed painting contractor with little to no track record, so I got money the only way I knew how, by using credit cards.

I wrote myself a credit card check and would pay cash for a property. Then I used another credit card to fix up the place and even paid the credit card with another credit card until I completed the rehab, rented it out, then refinanced it with a home equity loan and paid off all the credit cards.

Eventually, I shifted to using private money for my real estate deals, and later on I became a private money lender myself.

This may sound ridiculous, but one way to get money is to lend other people money (e.g. from your retirement/IRA accounts). It makes perfect sense to build your money list, which in my opinion, is just as important as a buyers list.

So, let’s look at some of the sources of money for real estate and note investors.

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8 Sources of Money for Investors

1. HELOCs

Home Equity Lines of Credit (HELOCs) can typically be on your primary or rental properties. I prefer using my HELOCs to buy notes or fund other people’s deals. But, if I need money for a personal real estate deal, I prefer to use private money.

Related: What’s Better, a Home Equity Loan or a HELOC—(Home Equity Line of Credit?)

2. Self-Directed Accounts

Self-directed accounts, such as Retirement Accounts (IRAs), Education Savings Accounts (ESAs), or Health Savings Accounts (HSAs) are great sources of capital.

For PPR, 30 to 40% of our sales and funding comes from this source, so it makes perfect sense for us to become well-versed in self-directed accounts and to do shared events with some of the IRA trustees/custodians.

3. Collateral Assignments

This is an additional obligation attached to a contract to guarantee its performance, such as by agreeing to transfer certain property or valuables to ensure the performance of the contract.

For example, utilizing collateral assignments by borrowing against our re-performing loans really helped my company get off of the ground. We didn’t have a network of note buyers at the time and by using this method to recapitalize, there were no taxes since it’s a loan.

4. Selling Partials

This is a great technique, especially when there’s a decline in market values, because you can sell part of a note and still retain ownership to the back end.

5. Forming an LLC

My partners and I used this method when we were getting started in the Notes business. We threw in our own money to purchase and work out a couple of notes until we knew what we were doing. (Keep in mind my partners could vote me out as manager.)

6. PPMs (Private Placement Memorandums)

Today I look back, and I don’t know how I raised money any other way.

I often joke how a PPM acts like an insurance policy and a prenuptial agreement combined. It not only protects the investors, but it also protects the fundraiser. It spells out an orderly distribution if things go sideways and investors can’t say they didn’t know there was potential risk after reading through about six pages of risk disclosures.

Investors are also secured to the fund’s assets through Blue Sky filings, where each investor is registered with the state where he or she resides. (This is what Bernie Madoff didn’t do).

The biggest difference with operating an entity via private placement is that you’re pooling investor capital where the investors don’t have a say in the day-to-day operations and can’t normally vote out management (unless there’s liquidation).

7. Joint Ventures

This would be when multiple parties combine capital to purchase assets together but divide the assets up proportionately at the time of purchase. Each party would then manage their assets at will.

An example of a joint venture would be if John Doe put up $200K, I put up $300K, and we bought a half million worth of notes that we either divide up or work through together.

8. Brokering/Wholesaling

This method involves making money or notes just for putting the deal together or by connecting a buyer and seller of notes and/or real estate.

Related: Why You Need to Start Your IRA NOW…and Any Other Tax-Free or Tax-Deferred Vehicle You Can

Other Ways

Another great way to learn how to raise money is to raise money for others. That’s how I first started raising money via PPMs for commercial deals.

Along the same line, you can also learn by raising capital for charity. After all, many accredited or high net worth investors are involved with their favorite charities.

But my number one way to raise capital has been to teach it.

If you can show people how to invest, utilizing tools like self-directed IRA accounts and to safely invest in things like real estate and notes and mortgages, when you have a vehicle to invest in, you can easily raise money.

Today, one final technique I use to expand my relationships with the accredited investors is by joining CEO and business groups. It makes perfect sense if you think about it. Most CEOs are accredited, and a lot of folks in their Rolodexes are accredited as well.

Since I’ve been raising capital for so long, most of my network has been exhausted. So the only other way I’ve come up with, besides expanding my relationships, is to duplicate myself by coaching others with larger networks to raise capital on my behalf in exchange for access to notes and my administrative back office, including asset managers. By creating a win-win for other fundraisers, the sky’s the limit as to the amount of capital that can be raised.

I’d be interested to hear what some other BiggerPockets folks are doing in their efforts to raise capital for their deals. Also, “How many deals could you do with an unlimited supply of money?

Jump in on the comments below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

18 Comments

  1. You mentioned that you have exhausted your network. Do you have any sort of thoughts or a model on how that model exhausts itself?

    I guess what I’m trying to ask is, let’s say you have a network of 50 people with $100,000 each to invest. That’s $5 million in capital.

    When you say that your network is exhausted are you saying that you’ve invested their $5 million and they are not reinvesting their distributions? Are you saying that they have had their capital and profits returned on previous deals and are now longer investing on new deals?

    Or, are you saying that you’ve raised $5 million and now want to raise an additional $10 million for new deals which your current network can’t fund because they have all of their investable funds already committed in previous deals?

    Obviously there is going to be some churn as people die or their financial circumstances change so but I’m curious as to which dynamic is having the greatest influence on your need to expand your network in order to raise capital.

    • Dave Van Horn

      Hi Bill,
      Thanks for reaching out!
      Exhausted may have been a poor word choice on my part. We have very high investor retention (typically re-investing their distributions), and I’m constantly growing my group.
      But, we have more product available to us than we can buy right now. And so, growth-wise, it’s better for us to have multiple channels and utilize more networks. If we raise more capital, our company can grow faster.
      For example, while my network’s funds are invested, we can still be actively raising in another fund, which is open to my JV partner’s audience.
      Best,
      Dave

    • Dave Van Horn

      Hi Jimmie,
      Thanks for reaching out! Although my company doesn’t do any brokering/wholesaling, there is plenty of education available on the topic. Programs run from $1,000-$40,000, depending on what level you want to learn it at. There are also many articles about it here on BP.
      Message me if you want any additional info.
      Dave

  2. Great article Dave, another way which I have done in the past is borrowing against my 401k as well as borrowing against stocks which I own in an asset backed loan program many investment banks offer. The asset backed loans, generally lend up to 65% of the value of your stock portfolio with interest only payments around 4%. Both of these work well with value added deals where you can purchase, add value and then do a cash out refinance in a relatively short period of time to pay back the loans.

    • Dave Van Horn

      Gena, I think this is a great idea. I’ve seen commercial developers use this strategy, as well as some individuals who were buying notes. You’re able to keep your investments making a return; they’re just also serving as collateral for you to make money elsewhere.
      Thank you for sharing!

  3. Matt Faircloth

    Hi Dave,

    Great article. It got my wheels turning. We do our fund raising through PPMs also, placing the money in distressed rental real estate which we manage in house. I had been thinking about teaching people how to invest as a method to raise investors. Is that what you are doing, offering education on making passive investments? If so I would love to hear more on how that’s worked out for you.
    All the best,
    Matt Faircloth

    • Dave Van Horn

      Hi Matt, thanks for the positive feedback!
      A great way to raise money is to teach raising money. Another great way is to teach people how you invest with other people’s money. And, the other way is teaching people about self-directed IRAs.
      This has worked very well for us. Our investor Q&A’s have been a big part of that, as these allowed us to stay in-touch with our investors, while providing value. We even streamed these meetings online as a way to communicate with people across the country.
      Best of luck,
      Dave

  4. How do you go about using funds from an hsa account for real estate? Are there any specific rules or forms for it or is just a matter of using the money then indicating on your taxes that the money was used on real estate? Could it be that easy?

    • Dave Van Horn

      Hi Joel,
      Great question. What you would need is for a self-directed trustee to be the custodian of your HSA. Once you have that set up, there’s a simple direction of investment form that makes it easy to invest those funds in any alternative investment, including real estate.
      Also, you can invest those funds combined with other accounts, as long as they’re titled proportionally.
      I hope this info helps! Let me know if you have any additional questions.
      Dave

  5. Hi Dave,

    Great article. I am a new investor and just brought my first investment property. 5Bedroom, 3 Br house that is currently being renovated. Upon completion i will have approx 31k of equity left in the house. I want to buy more properties but feel like i have exhausted most of my resources at this time .

    Would you recommend me to take out the equity for my next project? I’m trying to figure out ways i can remain active in real estate. My financials will have me in a tight position until I start generating income from the newly acquired rental.

    What are your thoughts?

    • Dave Van Horn

      Hi Theo,
      Thanks for the positive feedback!
      Have you considered utilizing Private Money for your real estate investments? For example, what I usually do is that I use private money (or hard money) to acquire my real estate deals.
      Then, you could potentially tap into the equity of the investment property to do a private money loan to a fellow rehabber for their project. Doing so would help you build relationships for raising private money for your deals in the future.
      You could also keep your equity as a cushion for repairs, as it’s good to have reserves and capital available in case something comes up. Also, if you are looking to acquire private money, potential lender may want to see that you have capital for repairs or in some cases that you can assist or participate in the deal as well.
      I hope this info helps!
      Best,
      Dave

  6. Kevin Olson

    Thanks Dave, great article! This is something I am trying to learn more of and get involved with as I see the potential to scale your business much faster than any personal funds and credit cards could. Id love to connect and hear about how you present the “sales pitch” , created the PPM and what you currently invest in. thanks again for the article, hit a lot of what I’m interested in.

    • Dave Van Horn

      Hi Kevin,

      Thanks for reaching out, I’ll elaborate a bit more in our PM about getting in touch but to start to answer some of your questions I should start out by saying I’m not much of a hard seller. In fact, I would say I don’t really even have a pitch. The old adage of “people like to buy but not be sold” I find holds true, so the first thing I like to do with potential clients is build rapport.

      How I do this can vary from person to person, but when it comes to me talking about the potential investment opportunity I like to make sure that I’m well averse in the product or investment. And even before having that conversation there are a few things I like to have put in place. For example, investors tend to like to see experience and track record when it come to you and your investment because that shows confidence in the product or model. And if you don’t have that, you can find a partner or team member who does to add to your credibility. I also like to prepare answers to objections that investors may have.

      Aside from those things, I usually have a business plan, what our use of proceeds are, who my team consists of, answers about the potential tax implications, and most of all: a simple way to explain how this person is going to make money with me and how they’re going to get paid back. And it’s not always all up front, in fact much of what I do and say isn’t just in the first meeting, it’s through multiple touches since I think the most important thing is staying in communication with investors/potential investors before, during, and after they invest. Making the client feel special doesn’t hurt either, which is why (along with the communication aspect) is why I also try to host investor Q&A’s as well.

      At the end of the day the investor wants to feel comfortable, understand and like their yield, and feel safe. So lastly, you have to show them how you protect your investors. For example, in our current fund offerings we do Blue Sky Filings, other funds utilize audited financials.

      And there’s a short answer and long answer for the PPM question. The short answer is: I set one up with my securities attorney (which is pretty much necessary). As for the long answer: I started out Raising Capital for two other companies for commercial RE projects and learned (and got paid doing it) how to put together a proper PPM (This also helped in other ways when I started raising private money for my own endeavors later on). So the parts of a PPM are generally the same no matter the investment, so it’s a matter of explaining your business plan and model to your attorney to build it properly. And the more you have put together in advance of that meeting, the more affordable it will be. To start, you can probably go online and find some examples of the paperwork you need and go from there.

      And as far what I invest in now, my main investment of choice is notes for a variety of reasons. To put it simply, it’s really because they’re assets you purchase at a discount (often times a deep discount if buying in bulk) so I like the ROI, they’re secured by hard Real Estate, and best of all they can be very easy to manage – especially with a servicer in place. So since it’s the paper behind the property rather than the property itself, you have most of the benefits of rentals (including the steady cashflow) but there’s little to no headaches in regards to tenants, maintenance, etc.

      Hope this answer can be of help.

      Best,
      Dave

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