Before I became a full-time real estate investor well over a decade ago, I worked for a city’s public safety department, which is a combined police and fire department under one roof. It’s sort of an identity crisis by design, where one day you are driving a bright shiny rig, getting five-finger waves from the kids, and the next day you are trolling the hood in a black and white, getting… well, let’s just call it a different symbol of affection.
Having been on the scene of such a wide variety of incidents, from homicides to tanker fires to mediating “my neighbor is using my garden hose” disputes, there was never a shortage of unbelievable stories to tell. When my non-police/fire friends would ask me about the strangest thing I’d seen, I never had to make anything up. The truth is stranger than fiction!
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Am I Making This Up?
Is this truth or fiction? Did I really raise $5 million to buy an apartment complex in only two weeks — while vacationing on the beach? YES, this actually happened! Now, if I had a book, guru course or boot camp to sell, this is where I’d say that anybody could do it, and if you send me $995, I can show you how. But I have none of those things, so I’ll just tell it like it is. No charge.
The instructions for raising money are not as simple as “go to the freezer, take out the box, microwave on high for 3 minutes, eat.” There is nothing either simple or quick about raising money to grow your business. The truth is that not everybody can do what I just did (more on that later). If you are looking for a shortcut to using other people’s money (OPM) on a large scale, you won’t find it here. If you want the truth about raising money, read on.
You Have to Set Yourself Up First
Sure, it’s important that you have a great property for your investors and a solid business plan to maximize its potential – but that’s the end, not the beginning. The real work isn’t about finding a great property. It’s about building trust with potential investors. It’s about performance, or better yet, outperformance. What you’ve done is just as important as what you are about to do, so you have to till the soil before you can pick the harvest.
If you have been trying to raise money, but only achieving anemic results, you’re not alone. I read a statistic once that said that the average real estate syndicator raised $250K. Why do most people struggle to succeed? Oftentimes it’s because they are trying to play a game that is out of their league. Consider this advice: You must first understand your position in order to change your condition.
Be real with yourself: What is your position? “I’ve been reading books for two years, and I want to quit my job and buy apartment buildings, but I can’t seem to find anyone to invest with me” is a statement that I’ve heard many times.
This very statement implies a lack of understanding of one’s position. If you lack experience, it’s not likely that you’ll be successful in raising money to buy apartment complexes right off the bat. No one is going to invest money in you if you can’t show them that you can do what you say you can do. Just telling them won’t cut it. If you think you are ready, what do you have to show for it?
You’ve Got to Start Somewhere
Start small if you have to.
Don’t get me wrong, like many visitors to BiggerPockets, I started with absolutely no money, no rich friends, no wealthy family and no advantage. I told this story already on the BiggerPockets Podcast Show 3 and Show 76, but in case you missed those, I’ll summarize.
I’ve been in REI for over 25 years. I’ve bought, fixed up and resold over 600 houses. I’ve acquired over 100 rental houses and several apartment complexes, comprising hundreds of units in three states. When I left my law enforcement career to grow my part-time REI business into a full-time operation, I raised $500K from my coworkers with placements as small as $5,000. I was only able to do this because I had a couple dozen successful single-family flips under my belt and everyone knew it. They were investing in my flipping business, which allowed me to grow a proven model. They did not invest in a new, unproven model.
Eventually I was able to buy a few rentals using the profits from my flips, then a small apartment complex, then another, and then move to larger ones. Each strategy that I was able to prove, I grew by purchasing progressively larger properties with OPM. Over time I’ve built what was a fledgling business to a $50 million organization fueled by over $25 million raised from high net worth investors and family offices.
I didn’t get into the position of raising large amounts of capital and doing large deals overnight. It’s unlikely that you can either, so start laying the groundwork now. Aim low in the beginning. Raise smaller amounts for smaller deals first, prove yourself, and you will grow organically. There are no shortcuts. You must have integrity, build a track record, and earn trust. Without all three, it doesn’t work.
Discipline Drives Success, Success Attracts Capital
I’ve underwritten over 160 multifamily properties since my last acquisition, done numerous property tours, made several offers, and tossed out hundreds of properties that didn’t meet my criteria. While guys like Ben Leybovich, who said I wouldn’t ever find a deal good enough to meet my strict criteria in today’s market, might be surprised that I’m now buying something, I’m not surprised at all. The “Success Ratio” has stood the test of time: Underwrite 100 properties, make 10 offers, buy one.
Why so much effort to buy just one property? Because you have to be disciplined! I’m disciplined because I’d rather lose half of my clients than half of my clients’ money. You need to be just as careful with other people’s money as you would be with your own. You can’t afford to screw this up. Trust that takes years to build is destroyed in an instant if you lose your investors’ money. Every property you buy is a future component of your track record and you need to be disciplined in order for your track record to be successful. Getting too aggressive or making unachievable assumptions will result in your deals underperforming in the real world.
How it Happened
This property is just under 300 units and located in a major market in Texas. The interiors and exterior are tired and neglected which compromises the property’s income. All of the problems are easily correctable, it just needs capital and attention.
I signed the purchase contract the day before I left for a pre-planned vacation to Hawaii. Fortunately, I have a great team so I set everyone free to perform their role. The same day I descended upon the beach, my due diligence team descended on the property to spend several days there going through it with a fine-toothed comb. Simultaneously, I need to raise $5 million. No big deal. I meet with Bob, my director of investor relations. I tell him, “Bob, I’m going to Maui. When I get back it would sure be nice to have commitments for that $5 million.”
OK, so now the cat’s out of the bag. Now you know that the secret to how I did this from the beach is that I’m not in this by myself. As you grow, you will build your team. Until you reach a certain scale, you can’t support a full-time staff, so you’ll have to do the work yourself. Don’t try doing this from the beach, and forget about the four-hour workweek. You have to put in the time and the effort or it simply won’t happen.
Fortunately for Bob, we have hundreds of investors who have trusted us with their funds in previous offerings, and we have performed well for them. Many of them have referred their friends, and many other people have heard about what we’re doing and have asked to be the first to know when we launch the next opportunity. As you grow your business and establish your track record, this will happen for you as well. With ready, willing and able investors on standby, it’s easier to raise larger sums in shorter times. For those who haven’t invested with you in the past, a well-documented track record goes a long way to getting them comfortable. I can’t emphasize that enough: Make sure you develop a strong track record, and document it thoroughly so you can paint that picture for those people who didn’t take the ride with you.
Can You Do This?
Earlier I said that not everybody can do what I just did. Having read this story, do you agree? To raise $5 million in two weeks, you need to have everything lined up in advance. It’s fair to say that I actually started raising capital for this deal over 20 years and 700 properties ago, when I took in my first investor dollar for a house flip. So get started now. Create your relationships. Build your track record by demonstrating performance—and document it. Develop a following of high net worth investors. By the time you have all of these things, you are no longer “just anybody.” You are a responsible financial fiduciary. You are an expert in your field. You are proven. You are a disciplined and successful investor. And people know it.
So what about Bob? Did he pull it off? By the time I got back from my trip, Bob had commitments for over $6 million, $1 million more than we needed. The investment is not only fully subscribed, but has a waiting list. And a head start on our next acquisition.
If you want to move up to larger deals and raise capital to fuel your growth, start building your network. Do deals, even if just simple and small ones. Document them. Produce results. Be known. Methodically push your comfort zone to grow the size of your deals at a measured pace. Don’t try to go too big too soon. Back in my public safety days I used to joke, “When was the last time that the fire department was called because someone did something smart?” So by all means, don’t screw up and burn down your own career. I can’t respond to the scene to rescue you.
[Editor’s Note: We are republishing this article to help out our newer readers.]
Investors: What has been your experience in raising money for big investments? Have any questions about the process?
Be sure to leave a comment below!