Raising Capital In A Down Economy
As a real estate investor looking for capital for deals it can be very challenging
especially in a down economy such as the one that we find ourselves in. However, that doesn't mean that it is going to be impossible to raise money for your real estate investing business. The key is to have the right approach and to be able to demonstrate what you have to offer for potential investors.
Many investors make the mistake of believing that no one is interested in investing in this current market. With the prices of real estate significantly below their value highs, the thought is that people are going to be hesitant to invest their money. Basing your business and investing strategies on generalizations is a good way to significantly hinder your growth.
While it is certainly true that SOME people are going to be hesitant to invest in this environment, others are very excited about the investment opportunities that are available. They are just looking for the right opportunity to take advantage of. Others would love to take advantage of alternative investing strategies, but simply don't know what is available to them. You might be just the person that they can work with.
So how do you raise capital in a down economy? Let's start with how NOT to raise capital. It is guaranteed that if you don't ASK for the money that you need, you will never get the money that you need. One reason why investors don't get the capital they are looking for is because they are afraid to ask. They assume that investors are not interested in investing with them and as such, they never take the time to find out. There is no harm in asking for money. The worst thing that can happen is the person says no. However, what if they say yes? Imagine how easier your investing efforts would be if you have cash at your disposal to invest?
Now that you know how not to raise capital let's review some strategies that you can use to raise capital in a down economy.
One way that you can raise money in a down economy is to target high net worth individuals who may have been burned by other methods of investing. For example, there are a number of people who have a lot of money tied to the stock market. For instance, if you invested $100,000 in the S&P 500 index in January of 1999 and calculated how much money you would have by December of 2009, adjusted for inflation, you would only have $96,480 after 10 years of investing. That is a terrible rate of return and there are a lot of people who are experiencing those types of returns, if not worse.
By targeting these people, they often make great candidates for private investor partners to provide the capital that you need for your real estate investing business. You could easily provide them with a better return on the first deal that they did with you then what they are likely getting in the stock market. The problem is, they simply don't know about your program.
Another group that you can target is high income professionals, such as doctors, attorneys, certain types of accountants, executives and business owners. These are people that make a great income but need a place to invest that money. The places that they are likely investing that money (i.e. the stock market & their own personal residence) has likely lost money over the last several years.
Because of the returns that are available as a real estate investor, you can show them how they can partner up with you, get much better returns than what they are getting right now and even potentially make back some of the money they have lost. They are likely concerned about the economy right now because the assets that they are saving up for retirement and their children's education have likely diminished significantly. Investing with you is a potential solution.
Where do you find the types of people that fall into these categories? It's not like everyone walks around with a sign on their forehead that says "I have money to invest in real estate" or "I don't have money to invest in real estate." The key is to tap into your network and present your program to people that are already in your network. They may be the person you are looking for. They may not be the person themselves but they might be able to lead you to the right person. You won't know until you present the program to them.
That means you should have an idea of exactly how much money you will need to raise. You can calculate this number based on how much money you know you will need in order to acquire the types of properties that you are looking to buy and to put in the work necessary to make the property profitable.
For example, let's say you encounter a 3 bedroom 2 bathroom home for $75,000. The property has about $15,000 worth of work that it needs in order to get it back to market value. The market value in the area for these types of homes is $150,000. You would need to have at least $90,000 cash in order to purchase this property. You will actually need a little more than that to cover holding costs, but let's forget about that for now.
With the $90,000 cash, you can buy the house all cash. You won't have any mortgage on the property. You can invest the cash required to do the work to fix it up to market condition. You can then list the house at the market value, sell it and make a profit. The profit is what you will use to pay off your investor and any money that you have left over is profit for you. This is a great way to invest because you have other people putting up all the money, yet you are able to generate a profit. With $60,000 profit, you think you could give your private investor partners a much better return than what they are getting in the stock market? Consider this, a 10% return on $90,000 is only $9,000 and if you are in and out of the deal in 6 months, that is actually the equivalent of a 20% annual return.
Once you know how much money you need, the next step is to find people that have this type of money available to invest. A person doesn't have to be rich in order to have $90,000 to invest. There are a lot of older middle class professionals that have multiple six figures in their retirement accounts to invest. Suppose you have a single person with no kids that takes an early withdrawal penalty to take out the $90,000 from their 401K plan. They would have to pay approximately $16,000 in taxes plus $9,000 in a penalty, for a total of $25,000. Let's say you agree to give them half of your profit (which is a lot BTW), in this case $30,000.
Within a 6 month time frame of investing with you, their return would be enough to cover all of the money that they had to pay in taxes, the early withdrawal penalty, plus an extra $5,000 profit. The profit alone is a 5.5% return over a 6 month time frame, which is significantly greater than what their return would have likely been in a 401K plan over the last 10 years!
The best way to find these people is to start with people that you already know. Sit down with your family members as well as your friends and explain to them what you are doing. Create a nice presentation that highlights the key points to your program, such as how much money you need, what the money would be used for, how their investment would be secured by real estate, etc. Show them the type of returns that are possible and see if they are interested.
Will you have some friends and family members that won't be interested? Of course you will. However, there is a good chance that you will have some that would be interested. The reason why is because your friends and family members, in most cases, trust you more than they trust a complete stranger. They are already giving their money over to a complete stranger in the form of these mutual funds that they are investing in. They are clearly not happy with their returns. With a property that they know is worth at least the amount of cash that they have, it will be tough for them to lose money.
Besides friends and family, there are a number of other contacts in your associate circle that you can approach regarding partnering up with you in your real estate investing business. A great group to consider is other investors that you work with. If you currently have investors that you flip properties to, maybe they might be interested in partnering with you on a deal.
Think about groups of associates that you have where they are likely to have money. For example, if you have gone to real estate seminars, personal development seminars and other types of retreats, this is a great group of people to approach. People that tend to invest in these types of events usually have disposable income; otherwise they wouldn't be attending the event to begin with. Contacts that you meet while on vacation are another good group as well.
As you go through your contacts and identify people to approach, keep in mind that if the person turns out not to be interested, they could still potentially help you by referring you to their contacts. There are dozens, if not hundreds of people that they know that you don't. One of those contacts could be the perfect partner for you.
One of the most important steps towards being able to have an investor decide to do business with you is providing documentation to make the potential private investor partner comfortable doing business with you. While there is no rule set in stone that says that you have to have completed a deal successfully, the fact is, private lenders are going to feel more comfortable dealing with investors who have done these types of transactions before. If you don't have any money to do these types of deals yourself and you are having trouble with convincing a private lender to work with you, perhaps you may want to get a few deals under your belt by wholesaling the properties to other investors.
If you have deals that you have done before, it is a good idea to document some of these deals and highlight them when you are doing your presentation. Even if you didn't use private lenders for the deals, you can provide examples of what a private lender could have made with you if you would have used one on the deal. This way they know that you have experience and a track record and they will feel more comfortable doing business with you.
Once you find a partner that is interested, the next step is to agree to the terms of the deal and create the necessary structure to protect both parties. One of the most common ways compensation is done is by negotiating an agreed upon return on the partner's money after a set period of time. For example, you might agree to give the partner back their full investment, plus an additional 10% after 6 months. In the case of a $100,000 investment, you would give the partner $110,000 when you repay him or her.
To provide the best type of protection for both you and the partner, you should purchase the properties under some type of corporate entity. In addition, you should create a written document that outlines fully all of the terms and conditions of the partnership. Don't leave anything to memory! Document everything so that if there is ever a question or misunderstanding you can refer to the documentation.
Also, keep in mind that there are legal ramifications to arranging these types of deals so a competent attorney should be consulted. The other reason why you will want to consult with an attorney is because you want to make sure that you are not in violation of any securities laws. Securities laws are very serious and violations can result in very stiff fines and penalties. You may also want to speak to a tax professional to fully understand the tax ramifications from such a relationship.
Raising Capital In A Down Economy
By: Mike Warren
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