Jackpot!

The wheels were turning in my mind. The question was fired out from the audience and landed right in my lap like a carrier pidgeon from a long lost journey of many years ago.

This guy got it.

Here was his question

“Adam, when you do a deal, how much of your own skin do you have in the game?”

The question came from an audience member at a private money education seminar that I recently hosted. (In case you don’t know by now, I really love teaching people winning techniques and strategies to get other people’s money – OPM – into their business to do real estate deals.) When I host seminars, I will often take questions from the audience. This was a good one.

“When you do a deal, how much of your own skin do you have in the game?”

First of all, what this gentlemen meant by ’skin in the game’ was how much of my own money do I put into deals where I bring in private money money investors?

Since the tagline of this website is “getting the cash to do real estate deals with none of your own money,” my first answer to this real estate investor was that I normally don’t put any of my own money into deals. The whole point of using other people’s money is so that you don’t have to use your own. Not using your own money is not so much a free choice sometimes as a matter or necessity. When you are building your business, you may not have a ton of extra cash lying around. As you grow you company and cash flows, the options open up.

There are times when… I will choose to put my own money into a deal. From a personal financial standpoint, I don’t want to leave the cash I generate from my businesses on the sidelines when I could be investing it and getting great returns. Once you build up enough liquid cash reserves for yourself, you should invest some of that cash into deals that are going to compound annual gains of 20%+.

The key distinction with having private money investors is that you can choose to put your own money into a deal if you want to.  You are not forced to because there is no other way to close the deal. Before I developed my private money system and techniques, financing real estate investments was a crap shoot for me. Sometimes I’d get lucky and only have to shake a few trees before I could get a mortgage (that was before the subprime bubble crashed the mortgage market). Other times, I simply couldn’t close the deal because I didn’t have the cash for the down payment and repairs.

After I started working exclusively with private money lenders and equity investors for my purchases and rehabs, the good fortune of being able to invest in my own deals became a reality. If you have the cash and want to get great returns on your money, isn’t the logical choice to invest in your own deals?

At the same seminar, a great follow up question that was asked was:

“How to you explain to private money equity investors that you don’t have any of your own money invested in the deal?”

This was another great question, one that I will surely add to my Frequently Asked Questions page in my company brochure for private money investors.

You can attack this from 2 standpoints:

1. Time, energy, brainpower and effort ARE money
2. The private investor should simply look at the merits of the deal. If they’re getting a 15% return, who cares about anything else?

The second standpoint I believe to be incorrect. You should always be transparent with your investors and they have a right and a reason to  know how much of your own money you are putting into your deal with them. Many of them wont ask, but a few will, so be ready for the question.

I like to simply demonstrate to my private investors that the opportunity would not be available to them if I was not putting forth the effort and time to put everything together. And, of course, there are out of pocket costs to do this. It also takes relationship building, marketing and organizational efforts to bring everything on a good deal to fruition. When I offer an equity ownership interest in one of my companies or projects, the private investor reaps the benefits of years of experience and fruits of my labor. Once they know all of this and they also see that if the deal doesn’t make money, that I won’t make my profits (which is, after all, how I get paid) they are much more amicable to the deal I am proposing.

One of the best things you can do for bringing in private investors is to prepare yourself beforehand for any tough questions your private money investors might have. And, once you build up enough of your own passive cash flow from real estate investing, you will have the freedom of choice to invest your own funds into deals at your choosing.

This is the choice you want to have and private money makes it possible.