Before You Invest Using Other People’s Money, Know the REAL Costs

by | BiggerPockets.com

Recently, I spoke on a panel at a real estate conference. I was selected to be one of three experts on the topic of capital raising. Before I spoke on stage, the moderator of the panel asked the crowd of 300 people, “Who here would like to use other people’s money to invest in their projects?” Almost all 300 hands went up.

Everyone with their hand up would argue, “Why wouldn’t you want to use other people’s money to invest in deals? It makes it easier to scale, reduces your risk, and boosts your returns.” The surprising thing is that if the moderator would have asked me that very same question two years prior, I would not have raised my hand. Now, minutes from being one of the three on stage speaking about how to raise capital, I realized I was going to change my topic to what it really means to raise capital and the major responsibility it carries rather than how to do it.

Fortunately, during the panel discussion, the moderator asked me a question that allowed me to elaborate on my view of raising capital. When I finished talking, the crowd was silent for a moment as if they were still absorbing my response. The silence gave way to applause, and after leaving the stage, I had countless people thank me for my unique perspective. In this article, I will share and expand on what I said, why two years prior I would not have raised my hand, and what happened to change my mind.

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Where Borrowed Capital Really Comes From

Before we jump into capital raising, let’s talk about where that capital comes from. Where would you go if you needed to raise money? Like most, you would likely reach out to individuals in your social circle with sizable enough savings they may want to invest. People that have sizable savings usually have it because they worked hard, earned more money than they spent, and put some away for retirement/investing. The typical person does this by getting up every day, putting on their work clothes, and going to work for 8-12 hours a day, 5-7 days a week, for 30-50 years. They then take a small portion of that income and place it aside for the day they are able to retire. That is the norm and the reality of how the average person saves for retirement. And that is exactly the money that most people raising money will be asking for.

We trade our time for the capital we have, and then we stash away a little bit of it in hopes the pot will be big enough the day we get to retirement. It can’t be said better than in this excerpt from The Real Book of Real Estate: “In the end, the time we spent on this planet equals life. Most people would agree that a human life is sacred and carries a higher value than almost anything else on earth. Since every day working we trade our time our very lives for money or capital, I conclude that capital equals life. If that is the case, then capital, like life, should be treated as such.”

Related: 4 Tips to Raise Private Money for Your Real Estate Investments

So why does all this matter? Because when I saw 300 hands raise, I knew not everyone understood the magnitude of the responsibility that raising capital carries.

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Why I Changed My Mind About Using Other People’s Money

Two years prior to speaking at this event, I had a successful real estate investing business where I had not raised money from private investors. I understood the process and benefits, but I simply did not want the responsibility. If I borrow $100k from someone or several someones, what am I really taking? How much time did that person trade to earn that $100k? Maybe they worked 5 years to save that much, maybe 10, or maybe that is their full life’s savings. This person has not entrusted me with dollars in an account; they have entrusted me with a piece of their life and usually a large one.

A good friend of mine, Joe, lives in Ohio, and his parents live in Texas. Like many, he works very hard on his career and rarely has time to make the trip back to Texas to visit parents. He told me, “I go back home about once a year.” Joe’s parents are in their late 60s. If they are fortunate, they will have another 15 or so years to be on this earth. This means Joe will only see his parents roughly 15 more times in his life. He will only have those very limited experiences with them because he is trading the potential for more time with his parents in order to be at work most of the day and further his career and earn his capital. Let me clarify. I am not saying my friend is doing the wrong thing; everyone has a limited amount of time, and we all have the right to allocate it as we all wish. My point is that like Joe, most people make those sacrifices every single day when they go to work to trade their time to earn money.

This example of Joe is exactly why two years ago, I would have told you I didn’t want to raise money. The way I view capital—and I hope others will after reading this article—is what was given up for that capital rather than just numbers on a bank statement. If I were to borrow money from Joe, how many experiences with his parents did he sacrifice to make sure he had that? If I were to lose it, how much more would he have to give up to make up for the loss? When you take someone’s money, you are taking the portion of their life they traded to earn that capital.

Something changed from two years ago to now. Now my entire business model is focused on raising capital from private investors and deploying it into real estate investments that our team manages. So what changed? How did I go from wanting no part in raising money to building an entire business model around it?

The reason for now raising money is actually the same reason I did not want to. At the age of 26, I had just about reached financial freedom. I looked around and saw millions of others having their dream retirement ripped away from them even though they did everything right to get there. I am not talking about poor people, but the middle and upper class as well. After inflation, fees, and bad advice, they did everything they were told, and the reality is, they fell short of the dreams they sought. This is happening by the tens of thousands per day as the Baby Boomers reach retirement. So now despite doing everything right, they are not getting the life they imagined. They are having to work long and miss more experiences. That is when I realized how selfish I would be to not put my skill set to use. I realized how different financial success and self-fulfillment are. To me, self-fulfillment is how I can be the best I can be while also helping others do the same. In my case, I believe that is being able to deploy capital and make it grow in order to help others do good with money.

The Real Meaning of Money

I have frequent meetings with potential investors, and one of the questions I ask is, “If we are able to deliver these projected returns, what will you spend the money on?” I get some answers like “retirement” or “a boat,” but the other day, I had two meetings. The first person told me he wanted to use us as the investment vehicle to fund his daughter’s college, and another told me he was starting an orphanage in his home town in India, and the returns would go straight to that. When I left the second meeting, I had to take a moment to sit in my car and reflect on the impact that could be made from my own efforts in this business.

I now raise money because of the responsibility it carries and the good I can spread by turning money into more money. However, I write this article to make people realize the money they are borrowing carries significant meaning. It is not numbers in a bank statement; it is pieces of that person’s life—experiences they traded to earn that capital and also opportunity to give them the chance to have more of them, the opportunity to help others. I have never been driven by money, but I’ve always have been driven by the good money can do, and it took me a while, but I realize now the good is exponential when capital is viewed and handled correctly.

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Related: Sometimes It’s Better to Pass on Other People’s Money When Investing: Here’s Why

Let’s End With a Parable

There once was a young man named Sam who lived in a small third world dangerous village in the mountains where everyone there worked for a company mining rocks out of the side of the hills. In this village, water was scarce, but this was one of the few communities that had any water. The people worked all day digging rocks to earn a bottle or two of water from the company.

Nearby, there was a desert community that was safe, easy, and stress-free. Everyone wanted to live there. Many of the elders and fortunate individuals moved there from the mountain village. They would save up bottles full of water, preparing to one day live in the safe desert community where no water existed.

Instead of spending his life mining rocks, Sam instead began digging trenches that ran down the mountain toward the desert community. After years of digging, he was able to create a small stream that collected water off the mountain that ran it all the way to the desert community where he lived, and he had enough water for him and his family.

Sam was happy living in the desert, but he realized that the others in the community were running out of water bottles they had saved during their years in the mountains. Some of them were over-consuming, and many were losing water to evaporation. However, the man had no concern of running out of water. The stream provided a small but consistent feed of water to his home, just enough to provide for him and his family.

Knowing that his elders and friends in the desert community did not have enough water saved in their bottles, Sam went back to his mountain village and pleaded with his old friends to help him dig more trenches down the mountain to help the desert community.The mountain people needed the water the company paid them for mining rocks, so they did not have time to dig trenches.

Sam traveled back to the desert, where he asked his elders and friends if he could borrow hundreds of water bottles from each of them. In exchange, he would build not just a stream, but a river of water from the mountain to the desert that could provide for them and generations to come. The desert people agreed.

Sam knew these people had worked all their lives mining rocks to earn that water, and if he lost it or did not succeed, he would be losing all their hard work and sacrifice.

Sam took his borrowed water and hired the entire mountain village to begin digging massive trenches down the side of the mountain to the desert, the whole time paying the mountain people with the borrowed water.

Sam succeeded and created not just a stream, but a massive flowing river of water to the desert community that provided consistent water for the whole desert community.

What’s the coolest thing you’ve seen as a result of investing someone else’s money?

Leave your thoughts and stories below!

About Author

Jered Sturm

Jered Sturm is co-founder and director of sales and marketing at SNS Capital Group. Jered began in the real estate industry in 2006, working for a successful real estate investment company as a handyman. From 2009-2012, Jered co-founded the construction company Sturm Properties. Using his background in contracting and construction, he began investing in “Value Add” real estate. Now, after co-founding SNS Capital Group, Jered has conducted over 10 million dollars in real estate transactions. He currently co-owns and operates a portfolio worth over 3.7 million dollars in investment real estate.

12 Comments

  1. tim boehm

    Most people like borrowed money because they can go to Reno for free, if they win well everybody’s happy but if they lose they don’t lose their money. My business partner said this to me, never use your money because if you lose it you have nothing but if you lose someone else’s money you still have yours. This was a few years after he lost over 100k of mine, he had simply forgotten!

  2. Samuel Lacroix

    Great post! Although I’ve always invested love money with caution, this text really put It under a bright light. The coolest thing about investing close relatives money for me so far is those win-win situations where I can give them a good return on a relatively low-risk investment while increasing my buying power.

  3. JL Hut

    I have met many people who think they are noble and think their motivations are pure and unselfish. However, few are as noble as they think they are.

    One thing we are all born with is a well developed ability to deceive ourselves. I hope that Jered and all the rest of us are exceptions to the above statement, but we will not know until the village stream unexpectedly dries up and we divert our stream to the village and we do without any water, even if the government courts say it is not our responsibility.

    Until tested our nobility is just a theory.

    Will you pass the test even as your family cries out for water?

  4. Mark Graffagnino

    Thanks Jered. Best blog post I’ve read in quite a while. It what I’ve been thinking and says it better than I could have. I am very conscious of Part 1 (risking other people’s hard earned money) but I need to think more about Part 2 (the responsibility and the good I can do).

    On the flip side, as a private lender, this will become required reading for any potential borrowers.

    Well done.

  5. Joseph Hoot

    Excellent post Jared! It’s great to be able to be able to read/listen to something– an article, a book, a podcast, a blog post, whatever– and be able to reflect on your life and others. As I’ve gotten older, I’ve quickly learned that time is ultimately the most valuable resource. Although my profile and posts here on BP may reflect that I’m trying to build a business by investing in RE, the truth is my wife and I value our kids lives and our time with them, our family, and our friends the most and are just using RE as one of many tools to help us achieve our ultimate goals.

    Thanks for sharing! I hope others in our NW Atlanta group will also see the value in your post.

  6. Neil Henderson

    Excellent post Jered!
    I was in the audience at that conference when you spoke about this and I can tell you it left an impression on me and many others in the room that day. It’s something I think about frequently and especially when I talk to investors, most of who are family and friends at the moment. I think about the risks that I’m taking beyond just monetary. These are my family and friends. I’m risking my reputation with them, but THEY are risking those finite moments that they traded for the money that I’m asking of them. It’s important to remind ourselves of that for every dollar of investment we seek.

    By that same token, I’m in my 40’s and I know so many friends and family who are nowhere close to being prepared for retirement. Many have never really even thought about how much they’ll need to save to retire. Most of them have a very shallow understanding of real estate and I’m excited to educate them on how it might help them achieve their goals.

  7. Rick C.

    Great article, Jared! I want to let you know that our in person conversation on this topic last month had an deep impact on me and has changed my mindset for the better on what it truly means to use OPM. I am really glad that you have been given the opportunity share this very thoughtful perspective with the rest of the BP community. Looking forward to hearing more about this next chapter of your real estate journey!

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