If you’ve been investing in real estate for a while, chances are you have considered using private lenders (investors) to grow your real estate business. Most people fail when reaching out to potential private lenders or investors because they don’t answer the five critical questions that every private lender must have answered before investing with you (even if they don’t ask them).
If you can answer these five questions, you will dramatically increase your fundraising ability with private lenders. By putting yourself in the shoes of the potential private lender and investors and knowing what they are asking themselves when you approach them, you will help to position your offering in a way that greatly increases your odds of acquiring private lenders and investors to grow your business.
The number one question that private lenders want to know when approached is “Am I going to get my money back?” If they do not feel like they can trust you enough to know that they will get their money back, they will never invest with you. Essentially they are asking themselves if they trust you to do what you say you are going to do. Investors invest with people they know, like, and trust. They have to trust you and know they will get their money back, or they will not invest. Potential private lenders and investors have all heard the horror stories. At this point they are judging your ability to deliver, and the investor will not give you money until they deem that you’re trustworthy.
5 Questions You Better Be Able to Answer Before Private Lenders will Invest in You and Your Real Estate Deals
- The number one question that private lenders want to know before investing with you is “am I going to get my money back?” When you approach a potential private investor, the number one question running through their head is if I give my money to you, will I get it back? If they do not feel like they can trust you enough to know that they will get their money back, they will never invest with you. Essentially they are asking themselves if they trust you to do what you say you are going to do. Investors invest with people they know, like and trust. They have to trust you and know they will get their money back or they will not invest. I don’t think I have ever seen a financial plan that showed an investor losing their money, but potential investors have all heard the horror stories. At this point they are judging your ability to deliver and the investor will not give you money until they do.
- What’s in it for them? Potential investors want to know what is in it for them. Many people approach potential lenders in the wrong mindset and tell them all about what their money will do for their business. However, investors are concerned about what is in it for them and you must address that up front.
- If you have established trust, the next thing potential investors want to know is, what are my risks? Every investment has risks and private lenders want to know, if things go badly what is my downside? Will I lose all the money I invested or just part of it? Is there a chance I could risk even more than I put in? A realistic investor knows that there are things that could affect any real estate investment’s outcome. They want to know if you understand them and are prepared and that you have done everything you can to limit their risks. They want to know that you are realistic with your projections and they aren’t going to get hung out to dry when you encounter difficulties.
- Private lenders want to know how their investment is secured? If you are investing in single family homes, is it secured by a first position on the mortgage, title insurance and hazard insurance? If it is an equity partner, how is it secured? Is it protected by the cash flow it generates, hazard insurance, etc?
- Do you have a plan and is it realistic? Before potential investors will invest with you, they want to know if you have a plan, if you’ve done this before and have you thought it through or are you flying by the seat of your pants with their money? You must have a plan and it must be written down. You might think this is a “no-brainer” and that everyone has a plan before they approach potential lenders however, I’ve seen it over and over again that people approach potential investors and they have a vision, but lack a step by step plan for achieving their investment goals. They want to know that you’ve done this before or if they are going to be a part of a new experiment? This can be one of the biggest hurdles for new investors to overcome. But if you can show experience on your team (notice I didn’t say it had to be you) and have a written down, well thought out plan, you will greatly increase your odds of them investing with you.
If you do not answer these 5 essential questions when talking to a potential investor, they will not invest with you. However, knowing their concerns and answering them up front will greatly increase your odds of acquiring them as an investment partner and growing your business faster. The key to raising great amounts of private money lies in addressing potential investor questions before they are asked, having a realistic plan, doing what you say you will, and being likeable.
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