If you attend local real estate clubs or real estate seminars frequently, you undoubtedly have met people who have presented you with “the deal of the century.” This happens to me all of the time. I will meet someone, and after speaking with them for a few minutes, I start to realize that their ultimate goal is to find out if I want to invest my money in their deals.
Now, there is nothing wrong with networking and raising money for real estate deals. In fact, this is something that all of us need to know how to do as real estate investors. However, as someone who also invests passively in other people’s deals, there are some things that I as an investor look for before giving my money to someone else. First of all, I need to get to know you and trust you, kind of like dating for a while before getting married. Sometimes people jump into the proposal without taking the time to find out if the investor is even someone who would follow through.
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I was in Orlando recently teaching for a self-directed custodian company on tax saving strategies for real estate investors. Since I did not go on stage until the afternoon, I decided to spend the morning in one of their break out classes to learn some new real estate tips. About two hours into the class, I decided to get up and get a cup of water at the back of the classroom. As I drank my water, a nice man came up and introduced himself to me as “Jim from Texas.” He politely asked where I was from since the majority of the students in the room were from out of state. I replied that I flew in from Orange County, California the previous evening to attend the event. The very next thing that came out of Jim’s mouth was, “Would you invest with me?”
Now, some of you may think that I am kidding, but I can tell you that this is exactly how the conversation went. Two sentences after meeting him, I was asked if I would invest my money in his deals. After taking a hard gulp so that I didn’t spit out my water, I managed to gather my thoughts. Had I heard him wrong? It was impossible that a person I had just met ten seconds ago was already asking for money for his real estate deal, right?
Just to be sure, I politely said, “Excuse me? Sorry, I didn’t hear what you said.” Jim then replied, “No worries. I asked if you would invest in my real estate deal.” Then there was silence. It was as if this was the end of the story. Jim did not elaborate more on what his deal was, where his deal was, or even why I should consider investing in his deal.
If I had the time to play out this scenario a little longer, I probably would have jokingly replied with, “Why of course. I would love to invest in your deal. Who should I write the check out to, and how much do you need?” Unfortunately, I needed to get back to the class and did not have the time to carry on this comical conversation with Jim. Instead, I thanked him for the offer and excused myself so that I could quickly leave the situation.
This, of course, does not happen everyday. I often come across people who will tell me about a deal they have after speaking with me for a while, and other times, people will ask permission to see if it is possible to send me some information. This was the first time that I met someone who was so clueless as to jump into a proposal without even knowing my name. But thanks to Jim, I was provided with this opportunity to share what NOT to do when trying to raise investor money.
What NOT to Do When Raising Investor Money
Scare People Away
Jim is a classic example of what not to do when meeting with new potential investors. As with anything else in life, we need to have some common sense. Most people will not invest with you if they do not know you and trust you. So even if you have the deal of the century, do not ask for money from strangers you just met at an event. Take your time, and wait for the right opportunity.
Get Married Before Dating
Not all money is good money. Having a bad investor in your deal can literally kill the deal entirely. You would not want an investor to give you $10k for your deals and then call you every single day asking about their return, right?
Take the time to know who this potential investor is as a person. Knowing how someone acts under pressure and what their expectations are can be the key to ensuring that you and your investor have a long and prosperous relationship. Take your time to “date” each other first to see if this relationship can last.
Fail to Understand Your Audience
Know who you are speaking with, and know what the potential investor is looking for. The potential investor may be someone looking to turn a quick profit and could be your hard money lender on your next flip deal. Alternatively, maybe they have some money in their retirement account and are looking for a safe stream of income. You could use these types of investments as trusteed notes on your rental properties. Ask the potential investor questions to learn about what they are looking for so that you can position your pitch accordingly.
Give Away the Farm
One mistake that I see time and time again is over-promising returns. Yes, it is quite possible that you could pay your investors 15% interest rates and still make a killing on your deal — but why would you want to do that if they would be perfectly happy with 10% instead? Just because you can afford to pay an investor more doesn’t necessarily mean that you should. After all, it is human nature to associate higher returns with higher risk. So next time you think about giving away the farm, take a step back and think again.
Focus on the Wrong Things
We all get excited about the latest deal that comes across our table. Whether it is that under-valued rental property that we found through our mailer efforts or the re-positioning commercial property next to the new freeway exit being built, be mindful that the potential investor that you are speaking with may not be all that interested in the deal just yet. To a lot of investors, the details may not be as interesting as the person behind the deal.
Next time before jumping into the deal itself, be sure to take the time to share your personal success stories. This way, the potential investor can be captivated by your story and get to know and love you before they look at your deals.
What are the worst transgressions you’ve seen when it comes to raising investor money?
Let’s discuss in the comments below!