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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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.
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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.
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.
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.
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!