Raising Private Money – Getting Started

Raising Private Money – Getting Started

You’ve decided that raising private money is the next step in your real estate business.  So, what do you do now?

Before you answer, here are a few popular choices:

• Run around like a crazy person and tell people that you’ve discovered the next “BIG thing” that will make them rich.
• Put together a thick business plan and make proforma spreadsheets showing how investing with you can’t go wrong.
• Start posting ads on Facebook, Twitter, online classifieds, and in the newspaper about your amazing deal for them.

Most new investors getting started raising private money do one of these three things.  But, be careful following in their footsteps.  Two of the above choices could get you a nice visit from an officer of the Securities and Exchange Commission (SEC) for general solicitation.  And the other one, writing a business plan is important to having a successful business and raising private money, but it’s not the first thing you want to do.

Raising private money and finding equity investors to fund your real estate deals is competitive.  Raising private money requires you to have answers to many different questions before going out and talking to potential investors.  Questions such as: How much will you offer investors in return for their money? Do you want to have debt or equity partners? How much will you raise?  Will you be pooling a group of investors together or just partnering with one or two people per deal?  How long will the investment last?  Will you offer preferred returns?  Will you need a SEC attorney to help you with your offering?  And, perhaps one of the most important questions, why should the private investor invest with you instead of someone else?

All these questions are important to ask yourself when planning out your offering.  However, today I’m going to focus on the last question, as I believe it is one of the most important questions for you to answer when getting started raising private money.

Why should a private investor invest with you?  Great question.

If you haven’t thought of the perfect answer yet, that’s okay – I’m here to help.  It’s not always an easy question to answer and so many people going out to raise private money gloss over it.  They spend all their time making the perfect offering and think that the numbers are so good that the private investor would be foolish to not invest with them.  However, they forget the number one rule in raising private money:  People invest with people they know, like, and trust.  They won’t just invest with you because you have a pretty offering brochure.  You must help the investor get to know you and establish trust or they will not invest with you.

Getting private investors to invest with you is not a quick sale.  It’s a process. When a private investor invests his or her money with you, it’s not like walking into a retail store and selling a quick widget and then walking away never to be seen again (hold the Bernie Madoff jokes please).  Once private investors give you their money to invest, the relationship continues with them for months or even years until the investment has run its course.   And, hopefully, they’ve had a good experience they will invest with you over and over.  Remember, you aren’t just taking money, you are taking on partners in your business, and your relationship with them is very important.

The first thing you want to do before raising private money is establish relationships with as many potential private investors as you can.  Then, build those relationships.  Find out about each person, as well as their goals, and determine what returns they desire.  It takes time, but these relationships can help you grow your business for years to come.

Besides that, wouldn’t you want to know more about your investors and if they are a good fit for you and your goals before asking them to be partners in business?  Many people who want to raise large amounts of private money try to skip this step, but it is essential to being successful at raising large amounts of private money.

Once you have an established relationship and understand their goals, you can approach them about investing in your offerings.  By then, you’ll have already established the relationship and you can customize your investment presentation to them.  Establishing a relationship first (which by the way, the SEC requires) will greatly improve your odds of raising private money.  Establish the relationship and the money will follow.