Raising Capital for Real Estate Investing
The key to learning how to raise capital for real estate is to focus on identifying what today’s lenders covet the most (and give it to them). If you succeed, there’s no reason you shouldn’t be able to raise the real estate investment capital you need for your next deal.
Other People’s Money (OPM) is what makes real estate investing possible for a huge percentage of aspiring investors. Even the most successful real estate professionals and legendary investors almost exclusively use OPM to reduce liability and maximize returns. As you can see, raising capital is critical for investors of every level.
However, both novice and seasoned real estate investors continue to struggle with making the connection between potential private investors and closing the deal. (Or even understanding how capital works with an alternative strategy such as tax lien investing.)
This is a shame, considering there is more real estate investment capital out there than ever before. Remember, private money lenders want to work with you, just as much as you want to work with them. Private lending has never been so attractive or widely accepted, and the benefits for you and your lender are endless.
Raising real estate investment capital is about more than a simple message or conducting a presentation that resonates. It has to be more than a pretty website, thousands of inorganic Facebook friends, glossy folders and a nice suit.
Raising Capital 101
What Are Money Partners?
Money partners are anyone you decide to work with to fund a given deal. When it comes to raising capital for real estate, money partners can be especially helpful because they can enable investors without significant amounts of capital to get started. Depending on the arrangement at hand, money partners can finance a deal, provide advice and even share the risk of a given investment. Because of this, money partners are often highly sought after in the investment world. It's important to note, however, that partnering with other investors is mutually beneficial. Business partners stand to benefit from the success of a good deal just as much as you do; something that is important to keep in mind as you get ready to approach potential lenders.
Money partners exist throughout the real estate industry, though it is important to approach each potential investment with careful research and planning. It's not uncommon for even the most seasoned real estate investors to fail to close a deal with private money lenders or money partners. In order to ensure this does not happen to you, research potential investors you're trying to work with and put in time and effort to ensure you are prepared every step of the way. If you're interested in learning more about how to find private money lenders or money partners, read this guide.
How to Raise Private Capital for Real Estate
Private money lenders will often have their own set of rules and guidelines. While many will exercise similar practices, the criteria each requires of their borrowers is different. I maintain, however, that there are several universal things private money lenders look for.
If borrowers can identify what it is their money partners want, it’s more likely that they will receive the loan. You see, lenders are in the business of making money, too. When it comes to private money lenders, there are six P’s that you can remember. If you can give them the things I outline below, you could find yourself with the money needed to buy your next deal:
Protect their capital
Promise realistic returns
Prove your potential
Procure a great deal
Provide your track record
Promote relationship building
Expanding the Six Principals
1. Protect Their Capital
The primary concern investors have is protecting what they’ve loaned out. If they lose that, they won't be able to make a profit – which is the whole point. That’s why so many money partners have recently invested in low-yielding real estate products and ventures. When contemplating this factor, most look for collateral and how easy it will be to get their money back in the worst-case scenario. So be ready to answer these questions and have a plan B in your back pocket. It should go without saying, but the best way to work with a private money lender and raise the real estate investment capital you need for your next deal is to convince them that it’s worth their time.
2. Promise Realistic Returns
Where most real estate investors go wrong when trying to raise capital is promising huge returns. If you sound over confident, your presentation will automatically appear to be a “high-risk investment” or “scam," which is certainly not the message you want to send. You will have to be above average market rates, of course, but don’t project too high. The last thing you want to do is over promise and under deliver. Even if you think your goals are possible to achieve, start by under estimating and then deliver more later, which will create a sense of loyalty and reliability between you and your first line of money partners. If you tell them they will receive an ROI of 8% and they actually make 14% after all is said and done, you can bet they’ll put you at the front of the line in their contact database and beg you to take their money for your next deal.
3. Prove Your Potential
On the other hand, you need to make your investment sound appealing. Savvy investors with bigger pockets and heavy weight venture capital firms are, of course, interested in the promise of big wins. So while keeping projections conservative, don’t be afraid to hint at the full upside potential – those big numbers you are hoping you’ll really hit.
4. Procure a Great Deal
Everyone wants a “deal." There are two reasons for this. The first is that it's simply human nature. If someone thinks they are getting a good deal on a product, it automatically gives the impression of value. The second is that these individuals and money managers want to look smart and feel as though they're making a sound investment. They all have someone they need to impress. It could be their boss, their co-worker, their spouse, a competitor or even themselves. Regardless of who, your potential money partner will want to be able to boast about how intelligent they were to discover this high-yielding or trendy investment before everyone else. Help them out.
5. Provide Your Track Record
Most investors expect to see a proven track record. They want to know that you can deliver on your plans. If you don’t have direct experience in real estate investing, then what other relevant experience do you have or who else can you find to partner with? Have your portfolio ready to go with your successes on top. You’ve got to have the numbers to prove yourself.
6. Promote Relationship Building
Surprisingly – or perhaps not so surprising – having a personal relationship between both investing parties trumps the rest of the qualifications. So how can you build more authentic relationships or find like-minded individuals – whom you might already know – that might want to work with you? This is one of the most important habits to acquire as a real estate investor. Try attending a local networking event to get your face out there. If you want to discover a potential money partner and achieve success, building and maintaining relationships is a must.
Raising capital for real estate doesn’t need to be nearly as hard as many make it out to be. For those in the process of learning how to raise capital for real estate, remember this: working with money partners is as simple as doing two things – learning what it is they want the most and giving it to them. It’s the investors who can identify what today’s lenders are looking for that stand the best chance at getting the money they need for their next deal. With that said, pay special considerations to the steps above, as they offer insight into what the majority of today’s lenders look for in a borrower. Only when you can give a lender what they want will your chances of receiving real estate investment capital increase dramatically.
Have you had better luck raising real estate investment capital through another means? Perhaps we left something off this list you've had better luck with? Whatever the case may be, let us know what has worked for you in the past in the comments below.