Raising Private Money – Developing Your Offering
Last week we covered the first step to raising private money: developing relationships. Once you have developed relationships with potential investors who know, like, and trust you, it’s time to plan your offering. This is a very important step in raising private money. Your offering outlines what you will offer potential investors for their investment dollars.
It’s best to keep it simple. Make it short enough to keep it interesting, but long enough to make sure you cover all the important points. Remember, a confused mind says “no.” It’s your job to make it easy for the investor to understand. Make sure to speak in layman’s terms and avoid industry terminology that they may not understand.
Once you have the basics of your offer put together, you can then hire a qualified attorney to make sure you have the proper legal documentation together. We use a Securities attorney that knows the laws of the Security and Exchange Commission that regulate private offerings. They can be worth their weight in gold and we highly recommend that you use one.
Before you go and spend all that money on an attorney, here are a few things for you to answer so that you can make your attorney’s job easy. It can also help you cut down on those legal bills.
Developing your offer can be as simple as answering the following questions:
What will you be investing in? It’s as simple as what you might think. If you’ve already identified the specific property, you’ll list it here. If you haven’t identified a specific property yet, you can put the type of property you are looking for. Example: we are investing in multifamily properties from 20-40 units that are built in 1980 or newer.
How much are you raising? Here you need to say how much you money you will need. Remember, that one of the biggest reasons properties fail is because of a lack of capital. We recommend raising more than you think you’ll need. You can always give it back if you don’t need it, but there is nothing worse than going back and asking for more if you miscalculated.
How will the money be used? You need to be specific in how you will use the investor’s money. Example: we will be investing the capital in stabilized apartment complexes in our area. The investment dollars will be used for the purchase, closing costs, and also to fund a rehabilitation of the property.
What will they get in return for their investment? This one seems like common sense, but many people fail to spell it out. Example: the investor will get equity in the property. That percentage of equity will earn cash flow that the property generates on a monthly basis, and proceeds received at resale or refinance of the property in proportion to their ownership interest.
How will they get their investment back and what is the expected timeline? This question answers your investors’ number one question when you approach them about investing. The first thing they ask themselves is, “Will I get my money back if I invest with them?” Here it’s time to spell out how their investment will be returned to them and the expected timeline of the investment. Make it clear what your intentions are, but make sure you leave enough room that you aren’t forced to sell if you can’t maximize value. Example: the investor’s capital will earn a return on their investment based on the monthly cash flow of the investment over a 3-5 year period. At 3 years, we will sell or refinance the property and the investor will get their initial investment back first. After the investor’s investment has been returned, the additional proceeds will be paid back based on ownership percentage.
How many investors will you need? In this section you let the investors know if you will be pooling their investment dollars with other investors or if they will be the sole investor.
What will be the minimum investment amount? It’s not uncommon for an investment to have a minimum investment amount. You need to make sure this amount is appropriate for your specific investment objectives. If you are raising millions of dollars at a time, you probably want to consider a higher minimum investment to limit the amount of investors you be taking on. If you’re only raising $50,000, you might only take on one investor.
Planning your offering can be as simple as answering these questions. Once you have your answers prepared, it’s time to discuss with a qualified attorney. You’ll be well on your way to raising all the private money you need to fund your real estate deals.
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Great post Spencer-
Do you have any recommendations on other publications that go into great detail on this topic? Very well written article!
The best and most detailed book I’ve read on the subject is “It’s a Whole New World” by Gene Trowbridge who is an SEC Attorney. It’s a little pricey, but really detailed and good. There are a couple others on Amazon that have really great reviews, but I haven’t read them yet. If you are looking for a good attorney, I’d be happy to send you the one we use as well. Best of luck and let me know if you have any more questions. Spencer