Raising private money is a crucial part of being a real estate investor. It allows you to scale and do bigger deals. Without this skill, you will be forced to spend years working your way up from small single-family homes to duplexes, before being able to tackle an apartment complex on your own.
Raising private money also allows you to help others achieve financial freedom through your efforts. It’s a win-win situation, but it needs to be done correctly. There’s a strategy for raising money, and it requires some finesse.
We recently attended the “Raising Private Money Summit” in Denver, CO and learned the best practices for raising money from the top syndicators in the industry. I took detailed notes and compiled them here.
Here are the best tips for raising private money!
Before you start raising money for your projects, you need to have a mindset shift. This may sound corny, but it’s true. You won’t be able to raise funds until you believe that you’re doing other people a service and that they are lucky that you are presenting the opportunity to them.
You’re now in the marketing business. A large part of raising funds is to continuously promote your brand and your message to the world. You don’t just go up to a stranger and ask them for $50,000 for your latest investment. You need to build trust and give value before you can ask them for their funds.
You need to be seen as a leader and should be creating leadership platforms to share your message. This could be through podcasts, hosting live meetup events, or regularly posting on LinkedIn.
Don’t try to be someone you’re not. Just because you’re impressed with how another investor looks or talks, doesn’t mean that they’re doing everything the right way. Be yourself and the people who like you will start to follow you organically.
Clean up your social so that you seem more professional. If you have a bunch of pictures of you getting drunk at the club, do you really think people will trust you with their money?
Don’t just pop up out of nowhere and ask people to invest in your deal. You need to go through the process: you need to first sell them real estate investing, then your part of the real estate world (like apartments), then why you would be a good person managing their money, then the actual deal itself.
Send email blasts on a consistent cadence. They don’t always need to be business-related. They can be about life events like your latest vacation or celebrating a child’s graduation. There was an agent that started posting pictures of him and his wife on Instagram and he started getting more business.
People care about you and want to know more about you! They don’t invest in deals, they invest in you.
Nurture your audience and continually educate. Consistently release podcasts, blog posts, and videos. You can also be a top contributor on real estate investing sites like BiggerPockets.
If you’re good at live events, host meetups on Meetup.com. See my previous post about how going to meetups is the best way to become a successful real estate investor.
If you’re not good at meeting people in person, you can create a Facebook group to promote conversations.
Remember that you are not the hero; the investor is. Give them as much value as possible. Be sure to educate early and educate often.
A lot of people get intimidated when it comes to creating their online presence. Luckily, there are many simple tools for creating your own website. All you need to do is to create a WordPress website and install the Diva theme. You can view an easy guide to setting up your own site on Digital Nomad Quest.
When they come to your site, there needs to be something for them to do. The most important piece of information you can get is their email address. Unlike other platforms that can kick you off of their platform, you can always rebuild your business if you have a solid email list.
Use Mail Chimp, Active Campaign, or Convert Kit to get people on your email list. Give them something of value that they’ll be willing to give their email addresses to get.
Don’t make the free download a 17-page whitepaper on a generic topic like why investing in multifamily assets is a good idea. Even though it’s free, it takes a lot of their time. Instead, offer them a link to a 10 min video that teaches them something specific: i.e. Top 10 Tips For Raising $1 Million Dollars In 1 week With No Experience.
Only after you have a specific offer should you go on other people’s podcasts. You want to have something to promote so that you can get more emails on your list.
Speak to potential investors and ask them what they are looking for. Do they want cash-flow, tax advantages, or a way to diversify their portfolio?
Do they have enough liquid funds to support your deal and their life requirements?
Make sure they are comfortable with having their money illiquid for 5-7 years. You don’t want to get someone’s last $50,000 where they’ll be worried about it the whole time.
Your most unsophisticated investors are the ones who will invest the least and will give you the most headache
See if they’re accredited or not, you can decide if you want to make your next offering a 506(b) or 506(c)
Prime your investors of the kind of deals you come across (asset type, size, typical return), so when you have it, you can just go up and say, “I got one similar to the one I showed earlier”.
A no doesn’t mean no, it just means no right now. Some people need to be nurtured for a while and they’ll be watching your progress. If you do well they might invest in your next deal.
Over disclose and always tell them that your investment is extremely risky and that there’s a chance that they could lose all of it. It’ll keep you safe and it’ll set the expectations low.
Investor certainty is more important than return amount. The more certain a deal is, the less you need to offer for returns.
Webinars are a great way to raise money from investors. Host a few live ones and record the best ones. Explain the whole process as clearly as possible. If people get confused, they won’t invest.
Tell a story, show footage of the place so people can “feel the investment”.
Fund early and even offer an extra incentive if you have the funds wired into the account a month early.
Send docs out ASAP, it lets people reject your deal faster so you have more time to replace them if you need to
If they want to fund with an IRA, make sure they’re using an IRA custodian. If not, refer them. Keep in contact with the IRA custodian and make sure everything’s on track. If you need a referral to a self-directed IRA manager, check out my podcast episode with Bill Neville of the Entrust Group.
The 1 Day close method is a technique to get many subscribers to fund your deal at the same time. Get them to raise their hands to an opportunity and fly out to you. After you showed them the opportunity in person, you can make the subscription pitch to all of them at once. When they see everyone else in the room doing it, they’ll probably do it too.
We didn’t go over continuing investor relations much because this was a summit about how to raise money in the first place. But if things are going poorly with your investment, you need to initiate the conversation with your investors. Don’t surprise them last-minute with bad news.
There are many pieces to syndicating a deal. You can find it, raise private money, maintain investor relations, etc… you don’t have to do all of it.
Find a sponsor and offer them value. Help them raise funds and help them find deals. You can get a small piece of the general partnership and will get valuable experience that will count for your next deal.
General partners can make money on a deal without investing any of their own capital. They also have control over the decision making for the project. As real estate professionals, they can take advantage of more tax benefits than the passive investor can. When the purchase a property, they receive an acquisition fee of 1.5-2% of the purchase price. They also get paid around 1.5% of the total gross income as an asset management fee every year.
But there are some downsides to being a general partner as well. It obviously takes more time and effort. As a general partner, you’re also more susceptible to litigation.
The eQRP amazing tool to help you invest in real estate with your retirement account. If you just use a self-directed IRA to invest in real estate, you could be subject to UBIT, extra taxes for retirement accounts if the property was purchased with leverage.
We already covered this topic in great detail in an earlier post. Check out the Podcast here!
Private investors like to take a close look at the sponsors first. Bad sponsors can make a good deal go south. They will perform a background check on the sponsor and will check their previous performances.
There needs to be a succession plan in case something happens to the key manager (like if they get run over by a bus or something). Luckily, there is keyman insurance policy for this scenario.
Do a gut check, there are lots of deals out there. If something doesn’t feel right, just pass on it.
Do you believe in the sponsor’s assumptions? And do you think the market is going to up in that location?
Passive investors want to see that the distribution between sponsor and passive investors is fair.
Too little money for a sponsor is scary because when things go bad they’ll just leave. Too much money and you don’t get enough return for the same amount of risk
The typical split is 70/30 (70 on the investor side) with an 8% preferred return.
Check out my video to see how syndications work.
In 506(b) offering, you can raise funds from up to 35 non-accredited investors, but aren’t allowed to do a general solicitation. So no posting on Facebook with details for your latest deal!
In a 506(c) offering, you’re allowed to do a general solicitation but can’t raise funds from non-accredited investors.
To get around the grey area of marketing your deals, make your public-facing marketing purely educational and not property specific.
You can educate them on why a certain type of deal makes sense. Then, of course, let them know when you have a deal that’s similar to those criteria.
You aren’t allowed to raise private money for other deals and get compensated for it, or else you’ll be branded as an unlicensed broker-dealer.
To bypass this, you have to be part of the deal. i.e. you can sell your own property without a license but not someone else’s.
A creative solution is to structure a large block, charge a flat fee (not based on how much you raise) and negotiate a piece of the general partnership. By structuring it this way, you can also let your investors come in with a smaller minimum investment amount.
Your track record and reputation matter a lot… but also, people forget quickly. Be upfront about your mistakes and share the lessons you’ve learned.
Marketing is king in the business, educate a lot!
Do everything earlier than you think you’ll have to. Create your platforms now, before you’re an expert, start talking to investors now to raise funds.
Big and small deals take the same amount of work, so do bigger deals. If the deal is good, the money will come, so don’t worry about the money.
Raising private money is a great way to scale your business. It allows you to do bigger deals without the fear of not having enough capital and lets you invite friends and family into your opportunity.
These tips were created by absorbing all of the key points from each speaker, then organized based on the category. If you want to see the raw notes with each speaker’s main talking points, you can view them here.
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Great information thank you. I checked out information on 506 (b) & (c). What I read is that both allow accredited investors but (c) allows up to 35 unaccredited investors. Unaccredited investors must understand what they’re investing in. Is this your understanding as well? If information is provided to accredited investors it has to be provided to everyone. What do you know about “blue sky” laws in each state? What fees are involved for getting a 506 (b) or (c)?
Sincerely,
Robert