7 Truths About Private Money That Will Help You Raise Capital
We all have beliefs about money, most of which have come from our childhood and education—me included. Oftentimes, many of these beliefs are either untrue, misconstrued, or limiting. There is probably too much psychology here at work that I’m not qualified to discuss, but as you read the rest of this article, especially if you doubt that someone else would gladly (even gratefully) give you money to help you do a real estate deal, try to have an open mind and consider that most people you know could and probably would invest their money with you under certain conditions.
Raising private money is a touchstone to almost any business or investment. To do it effectively, one needs to accept these 7 truths.
7 Truths About Raising Capital
1. There’s plenty of it.
The amount of capital available to you is basically infinite, with a lot of it (especially initial funds) close at hand. I know because I started without a cent to my name, with my immediate network in the same boat. Today, the majority of my immediate network (who aren’t professional investors) have made successful investments. And I’ve learned to cultivate my expanded network to do the same. There’s money out there, even within reach. Your job is to help it find you, and my job is to show you the way.
2. Money follows the deal.
People with money to invest often feel some anxiety about whether they’re making the best use of it. These people (again, me included) tend to be on the hunt for new opportunities to make a good return without undue risk. I often see forum posts here on BiggerPockets that say, in so many words, “I have this great deal, but I can’t find the money for it.” My response is almost always, “Take it to your local hard money lender or a local real estate group with lenders in attendance.” I say this because if the deal is truly good, money will seek you out. And if you do attend these meetings, show this deal to lenders, and get turned away? Well, that tells you the deal isn’t quite good enough, and you know what they’re looking for in the future.
3. Deals alone aren’t enough. People invest in people.
Have you ever walked away from a seemingly good opportunity because you felt uneasy about the person who presented it? I know I have—probably more than I have invested in deals, which is saying something but makes sense. It reminds me of things like the 80/20 rule (also known as the “law of the vital few”). In my experience as a private money lender, no deal is good enough to warrant working with someone I don’t trust. And the same thing goes for me as an investor looking for a place to park my money. As someone looking to raise capital, you’ll be on the right track as long as you act with integrity, even if it hits you where it hurts—the wallet. (I’ve seen the best fundraisers I know take money out of their pocket to pay their investors back long before they’d even consider a wind down. That’s how important reputation is in this business.)
4. Your private money partner wants you to make money, too.
Never think that your private lender resents you making money on a deal. They want a win-win for the simple reason that it’s in their best interest for you to become a long-term deal partner, and that won’t happen unless you’re consistently successful yourself. A good private lender knows that he or she is getting a good deal by making a reasonable return on their money, and they love it when you make a healthy profit on top of that. So don’t be suspicious if they’re positive, and be sure to consider their advice. Remember that they were probably once in your position as well.
5. It’s OK to turn down someone’s money if it’s not a good fit.
Read back over the first three points above. I encourage you to see the value that you’re providing to a private lender and be OK with walking away from someone who’s not a good fit. These deals should always be win-win. Like I’ve said before, the money is out there, and a good deal will attract the best of it.
6. Assume nothing. You never know whether someone has money or can connect you to someone else who does.
It’s human nature to size people up and make assumptions about them based on limited information. My recommendation is try to avoid that mindset. It’s just not possible to know whether someone has money or has access to it. Speaking from experience, I’ve been surprised more times than I can count by whether someone did or didn’t have money, so it’s a good practice to suspend judgment and make it clear to anyone and everyone you talk to about real estate that you’re looking for ways to help private money partners get solid returns in a safe, secure way. Besides, it never hurts to treat someone the way you want to be treated. They’ll be sure to remember it and speak your praises if/when you need it most.
7. There are a million ways to structure a private money deal. Do your homework on this.
Sit down, get comfortable, and search BiggerPockets for “ways to structure private money deals.” That’s the first thing I’d recommend when it comes to thinking about structure. Spend several hours soaking up the collective experience of your fellow BPers and then bring it all back around to figuring out how to help a private money investor get what he or she wants. If you do go to an attorney for assistance or to draw up paperwork, you should have a good idea of how you want to structure an agreement.
More Thoughts on How to Attract Private Money for Your Deals
Maybe before we get into how you ask for money for your deals, you should probably look at why.
Why would they invest with you?
- Do you have a great deal?
- A great track record of success?
- Are you knowledgeable and experienced?
- Do you have a great team or business model that you can explain?
What is it about your business model and the way that you execute that would give an investor confidence to want to do business with you? What about it makes it more advantageous than other business models?
Gitomer’s Wisdom: Do they like and trust you?
I’m a big fan of an old Philly salesmanship expert by the name of Jeffrey Gitomer (the #1 sales guy I know) who says that people like to do business with people they like and trust. That sounds simple enough, so why would people like and trust you? Is it your good reputation? I’m sure we’ve all met the shady wholesaler who is always looking for money and is always having trouble raising it. You know the slippery guy who shakes your hand and you have to check to make sure you still have all your fingers when you walk away. Obviously, his reputation precedes him. So how do you become trustworthy? I think it’s simple.
Do as you say.
When it comes to building trust, it really comes down to this simple rule: Do what you say you’re going to do. Demonstrating personal integrity isn’t just a good way to live. It’s good business and shows you follow through and are dependable. And when you’re in a position where you can’t fully deliver (because let’s face it—unexpected things can happen), investors still appreciate communication and knowing that you’ve done all that you can do.
Take care of your investors.
In addition to having a good deal, a good plan, a good team, and keeping to a schedule, are you protecting your investors first? This means properly securing them with the right paperwork and recordings and basically protecting their money as if it were your own. Expressing this at the outset is key. Plus, with the mindset that this is “your money” just as much as it is theirs, protecting it becomes just a part of who you are as an investor and how you do business.
Know who you’re planning to ask.
Once you have a good answer to why someone would invest with you, you’ll need to figure out who are you planning to ask, or better yet, who your ideal investor is. The knowledge or experience level of the type of investor you ask to invest in your real estate deal is critical. Some people may not understand real estate investing or think it’s too risky.
For me, other real estate investors (especially those with self-directed retirement accounts) have been a great source of capital for my real estate deals. They understood the investment vehicle and knew that I knew what I was doing. In fact, I might have also lent them money for some of their deals, even out of my retirement account, funnily enough. So, why swim upstream?
If you’re asking folks who are only familiar with traditional investment vehicles like stocks and bonds or who are unfamiliar with investing at all, they may not appreciate the full value of a real estate investment with collateral. If you keep things simple enough with all the benefits and advantages, you may have a chance. But I don’t believe in trying to sell anyone because at the core of that strategy, it’s as though they don’t want to invest in the first place. I just want to find a potential investor where if I say enough about the investment and what it has to offer while outlaying the risks involved, they understand and are interested.
Tip: A great way to “ask for money without the asking” is to start out with this question: “Who do you know that may be looking for a good solid return backed by real estate?” But, of course, that’s after asking them first if you can be of help to them in any way.
The point is that asking them if they know someone is usually better than asking them outright. And if they do know someone that is interested and eventually invests, they’re more likely to do it as well.
Picking Your Investors
Today, for my company, as we raise private capital for our note funds, it’s not only about me or our team interviewing an investor to see if they’re a right fit for us; it’s about if we’re a right fit for them. Our conversations with investors are about their goals, needs, and strategies. None of us can be everything to everybody, and we’d much rather develop more long-term strategic partnerships with an investor based on mutual respect and comfort than have them simply give us capital. It’s not time wasted on our end either; it’s time invested, and at the end of the day, it feels much better than asking “Would you be interested in giving us money?”
So, let me ask you, what do you feel are the biggest challenges when it comes to asking for money? What was it like when you got your first investor? What works for you now as you find new investors?