But it’s quite another to raise capital for bigger deals, like apartment buildings or commercial real estate.

The reason I focus much attention on raising money for house flips is because this is where I get most of my questions from readers and it’s also where the majority of my own business in real estate comes from.

However, over the past 2.5 years I have increasingly pursued commercial real estate opportunities and it now represents about 45% of my total real estate portfolio.

Since there are quite a few real estate investors who also bridge the residential/commercial gap I want to go over some tips on getting money for bigger projects. For all intents and purposes, “bigger projects” mean over $1,000,000. Could be multi-family, office, strip mall, medical, etc.

The first thing you really have to think about when raising private money for commercial deals is… …the minimum amount of private money you need. A big mistake I made with one of my first projects was not raising enough money in the beginning, then having to go back to the investors for additional funds to cover working capital short fall.

Think this is a no-brainer? Think again.

You see, just about every number you get from a seller of commercial real estate must be taken at face value as a complete lie. Yes, you read correctly. If I get a rent roll from a seller of an apartment building, I assume it’s a lie. When I get into diligence after PA has been signed, I look to the bank statements to cross-reference deposits, etc. But still, there’s a large amount of leeway in between numbers presented by seller and what is actually going on.

You’d be amazed at how may ways there are to manipulate financial numbers (remember those Enron guys?).

So, what happened on my deal was, based on diligence, I thought we needed $350k for a purchase. Turns out we needed $400k. Had to go back to the private investors to pony up more dough. This was not fun. Made me look amateurish. Better to always raise more than you need and give some back at the 6 month mark (even if you have to pay extra for it in terms of cost of capital) then to be forced to get additional funds.

This brings me to my next tip for raising big money, which is to carefully select the private investor prospects you will market and present your deal to.

In residential real estate, if you are getting $100k in private money, you can easily give a mortgage (or trust deed) to provide collateral for the loan. But in with a commercial deal, if you are getting any type of institutional financial for part of the purchase price (like a bank loan), then the bank will be in first position and they will often require you to not have any other debt on the property (which could impede cash flow).

Yes, this means you’ll have to raise equity capital for the portion of the purchase price (and purchase costs/fees/working capital/reserves).

What is equity capital?

It’s where you give an ownership interest to your private investors instead of a promissory note.

Your private investors will share in the profits and capital gains on the deal instead of receiving a fixed interest payment.

Personally, this is my preferred way to finance most projects, as the capital is more flexible and I can do more things with it. It’s also easy to present this concept to accredited investors, who are usually familiar with the terms of how such deals operate.

Your private investor prospects for bigger deals should be accredited (read: relatively wealthy) investors who have a time horizon for a minimum of 3 years. They can lock up their funds without needing them for 3 years or longer. This is critically important because redemptions of private money can be a killer. You don’t need people calling you in 6 months wanting their investment money back to go on vacation.

Another important tip is to make sure your deal has sex appeal. If it doesn’t, create some.

There is a certain segment of private investors who are attracted to the ‘bond-like’ investment of steady returns provided by a promissory note. Then, there is another contingent of investors who will be bored with this and your message will bounce off. When you raise bigger money, you must make your deal exciting. You must show how the investors stand to make bigger money than normal. You must show how your project has a true unique selling proposition.

One thing that has been a total flop for me is: raising private money from accredited investors to acquire stabilized, performing apartment projects in good areas. Since the project is stable, the rents are almost maxed out, the seller is not desperate, the area is not really on the upswing. If the purchase play is to simply buy performing cash flows, the private investors wont stand to make much money when they are riding along with you. Plus, there is not much sex appeal with this type of deal…outside of a large building structure bringing pride and a little bit of an ego trip.

And there’s another one…big money investors-at least many of them-really dig the ego trip of investing in real estate. There’s a little bit of “look what I got” factor at play. This is why I encourage regular communication with your lists of prospective and current investors, where you show pictures of the projects you are working on and (hopefully) pictures of other investors with YOU at these projects.

It makes everything more real and tangible.

Quite a few of my current private money lenders still call me and tell me they “just drove by that house we did last year…that was so nice!”

The pride of ownership factor is a big deal.

When you go after projects that are just a simple purchase, buy and hold, then it’s harder to sell the “upside” of the investment. And savvy investors – those with money – know there must be a value-add in order to maximize returns. You must be prepared to answer this question. If you don’t have a strong value-add, re-think the project.

Principally, raising money for bigger projects is all about these basic things:

1. Credibility (of you)

2. Believability (of project and plan)

3. Execution

4. Timing

If you line these up properly, you won’t have any problems raising capital for your deals. Keep in mind, raising private money is an ongoing process and must be part of your business.

Real estate investors who treat funding as a “part of the time” sort of thing will get “part of the time” sort of results.

This is one of the most important questions you must answer in raising private money.

In fact, you should answer it even before you consider getting 1 dime from an outside investor.

Just as if you were going into a bank to get a loan for your business, you should treat private lenders the same way.

If you were going to get a bank loan (assuming they did such crazy things) would you:

• wear a suit?
• have a business plan?
• know your facts?
• be on time?
• have a rehearsed presentation?

My guess is the answer would be “Yes.”

If so, I’m not sure why it’s any different for real estate investors wanting to raise private money.

Each month I attend a local REIA meeting. To meet new investors, network with friends. Here I often meet with clients and students.

And, inevitably, I have people approach me about raising private money.

They want to know how to do it.

My first question is: “how much money do you want to raise? And for what type of projects?”

They are stumped with this simple question.

Zero preparation.

Spending zero time and not preparing for anything are sure ways to fall flat on your face. I think the reason real estate investors fall into this trap so easily is because our projects pay such great returns. After all, why would anyone simply fall all over themselves to throw money at us.

If only it were that easy.

Just because the profits and potential of good real estate investment deals are readily evident to us doesn’t mean these benefits are obvious to others. Especially those who don’t know a thing about real estate.

To be a true professional, to truly strike gold in raising private money, you must be prepared.

Think of yourself as a professional athlete. An Olympic competitor.

Would you approach the starting line without ever having done one hour of practice? Would you decide you were going to swim competitively and then simply show up to a swim meet and assume you would win?

Apply this same approach to your real estate investing business (read: business, not hobby). You should allocate the amount of time each week necessary to build a solid business. Funding is one part of the equation. For me, its the most important part.

I still spend several hours per week marketing for private investors. Setting up meetings. Planting seeds. Working on my marketing pieces. Looking for ways to improve them. I take my business and my profession very seriously.

You can do the same thing. Doesn’t matter if you are working full time and investing in your spare time or not. Just because you invest part time doesn’t mean you get to put in 1/2 the effort. Your potential investors are looking for weak links in the chain. Reasons to not place funds with you.

You must give them every reason to write the check. Remove objections before they arise. Be professional in everything.

And that is what preparation is: professionalism.

It gets results.

Try it.

-Happy Investing

Some people trying to teach on the subject of raising private funds claim you can look up private party lenders in your local public records and then get these people to place funds with you.

I admit, this sounds like gold.

But it is really a mirage. More like the lost city of gold.

For many reasons.

I will cover a few of the basics:

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People will default to the person more than the product every single time.

Therefore, you must be personable.

How?

Inject some personality into your marketing, start being more you and less the other guy. You’ll start getting better results.

In The Book on Private Money, I write about the resistance I faced in raising private funding for my real estate investments before I realized one simple fact:

Investors bet on the jockey, not on the horse.

Seems strange to say, since you might be conditioned to believe that the most convincing part of investing with you is the collateral for the loan…

Guess what? No real private investor wants to even think about foreclosing on you. In judicial foreclosure states, this is a nightmare and it is an all around ugly end.

Or, maybe the rate of return is the harbinger of your approach…

Guess what? The return only gets paid if you execute on your plan.

Which brings us back to YOU.

Start selling you more than the deal.

Sure, you have to focus a good deal on the opportunity itself, show how it’s a no brainer to get involved. But make sure you spend a good deal of time on you.

In your marketing materials, write in the first person. Don’t say “we,” say “I”. You are the person running the firm. Write a “letter from the Chairman” or (Chairperson”). This has worked wonders for Warren Buffett.

When you write your monthly newsletter (not e-newsletter, real newsletter), include some writing that is written in 3rd person and then include a column written by you.

It’s not a bad idea to volunteer to write a pro-bono investment column for your local mom&pop newspaper. Even if you have to pay to be in the space, write an article once a month or once a week is a great way to get interested investors. The key here is that you are providing value-added insights & comment (read: NOT advice. Never, ever, ever, never, ever say or word in any way that you are providing any type of investment advice whatsoever. This is a sure way to catch the ire of a regulator).

Stop Pretending

When you are not a big multi-national investment company, you cannot pretend like you are. I see a lot of websites and information from real estate investors aimed at prospective lenders. You’d think the site was published by a huge conglomerate.

There’s no personality at all. No profile on the owners. No pictures of the owners with their boots on out in the field checking out deals. There are no testimonials about what good people the owners are.

Puzzling.

Seems like everyone wants to seem like they are a Wall Street investment bank.

Even though the level of public trust in these types of institutions is at an all time low.

Also, remember to keep all of your communication in the form of a “YOU” message instead of a “WE” message.

There’s a big difference between:

“We provide the biggest, best, brightest and shiniest widget ever!”

And

“You’ll enjoy hassle free use of the ABC widget for a lifetime of enjoyment, guaranteed.”

As you move forward in your money raising efforts, consider injecting more personality, providing strong benefit driven messages for the reader and separating yourself from the pack. You will be glad you did.

-Happy Investing

Shut Your Business Down

Huh?

That’s right: if you don’t want to risk getting sued, raising the ire of people around you who hate their spot in life or jealous peers who gossip about you and your business like highschoolers at lunch time, then just pack your stuff up and get out of the game.

It is impossible to make everybody happy. You simply cannot do it. Stop trying.

One of the best money making principles I’ve ever heard is: “the surest way to go broke is to try and please everybody.”

Truer words were never spoken.

But don’t mistake this as meaning you should deliberately try to make people mad or be a jerk on purpose.

On the contrary, providing great service and value is first and foremost in any business owner (and real estate investors) mind.

Just remember that not everyone is going to be your biggest fan.

Why go on this rant?

There are several reasons.

Reason #1:

Frankly, I’m sick of talking to and hearing about real estate investors being taken to the cleaners by lawyers in some all noble effort to bullet proof their business with legal paper.

Can’t be done.

No matter what you do, you can always be sued for something. That’s the America we live in today.

It doesn’t matter how good the contract is, how much disclosure you make, how many times you have somebody sign something. If they get mad at you and their attorney thinks they can get money, they could sue you.

Am I saying that you should never have a contract? That you should do everything with the shake of a hand?

I only wish it were so.

Yes, you should have contracts. You absolutely must provide the proper disclosures to your private investors before they invest with you. You must carry the right types of insurance.

But you should not delude yourself into thinking you are invincible because you’ve got some legal papers.

Reason #2

If you lose money for someone in a real estate deal, you stand a chance to get sued no matter what. It doesn’t matter if you made the proper disclosures, the correct filings. People get mad when the lose money and they seek out recourse in any way they can.

If you make money for someone, while preserving principal value, you are very unlikely to get sued. You still might, but it is not likely.

This is why you must be extra careful with your investment selection when you are funding with private investors. Never over-leverage the property. Always have title, hazard and liability insurance. Be a good steward of the investors money.

Reason #3

Be not afraid.

I don’t want you to be afraid to raise private money – or even get into the business – for fear of lawsuit or generating flak from others.

And…

I don’t want you to be afraid of raising private money or investing in real estate for profit for fear of what others will say.

Sometimes people will say negative things about what you are offering with your private money investment.

Sometimes they will say negative things about real estate and how you “can’t make money doing that.”

If you are easily deterred or swayed by the opinion of others, shun your own carefully determined conclusions, then profits (and capital) will elude you.

To make money requires you to take bold steps. You must take action. Everybody said Henry Ford was nuts. Well, if that’s the case I’ll take a billion dollars and be called crazy than have empty pockets and get to stand in the approval of everyone.

Reason #4

Don’t be a jerk.

Profound, I know.

Still, it’s worth noting that you should keep an even keel in the face of the hyena’s that will always nip at your feet. By simply stating and pursuing a worthwhile objective and productive existence, you are effectively thumbing your nose at the doomed-to-be-broke-forever masses.

And the masses won’t like it that much that you stand out above them – or even strive to

Pay them no mind.

Put the blinders on and keep your foot on the gas.

-Happy Investing.

A wise man once said that.

My dad (who is wise) said that to me a long time ago. But I’m sure he wasn’t the first person to say it. And I’m sure when he told this to me he did not have private money lending in mind.

There’s nothing more important to pulling in private money lenders then timing.

• Timing of your marketing (when pieces are mailed, when follow up is conducted)
• Timing of the funding for the deal (fast close or long way out, managing the relationship)
• Timing for the private investor (life events, retirement, all come into play)

Timing for The Private Investor

If it wasn’t for good timing, on many occasions I would have lost out on more than a few private money deals.

In recent memory, the crumbling stock market of late 2008 – mid 2009 was the biggest boom to my private money raising efforts. The fear and pessimism on Wall Street and Main Street created a perfect storm of a problem that my investment opportunity solved.

Also, in my local area, the auto company re-structurings (much of it forced by government bail out dollars) gave a lot of Big 3 workers buyout money. What better place for these funds than to earn double digit returns in real estate? Or, perhaps just as good, pick up an investment property or two and turn that $100k into $200k or more in short order.

Timing can also work against you in raising private money as well.

For example: life events, such as kids going to college, divorce, health care issues, job changes, relocation. All of these events can prove to stop a private money deal dead in it’s tracks. If your lender is going through (or approaching) any of these situations, start taking preventative steps in your business.

Looking for timing of events can

• Do you know somebody or of somebody that is recently retired?
• Do you know somebody who just sold their company?
• Do you know somebody who just got a big payoff of some kind? Maybe a settlement?

Tap into these source by: acquiring mailing lists, compiling your own mailing list, leveraging referrals, networking.

Timing of Your Marketing

The timing of marketing and sequencing new private lenders is very critical. Try to avoid having mail land on Mondays. Don’t market around major holidays (unless you are leveraging the holiday in the promotion). Don’t market during heavy public awareness of global events (such as the recent Japan earthquake or, years back the U.S. war in Iraq or 9-11).

Timing is important with follow up marketing, meetings and scheduling deal closings. Schedule your mailing too close and you’ll depress response, too far away and people may forget about you and you will lose momentum/recall from prior mailing.

Timing For Funding The Deal

This can be tricky. Especially when you are using the ‘ready-fire-aim’ approach (that I like best). Meaning: you are raising money even with no immediate deal or placement for the funds. You want to have money at the ready and not be scrambling for it. But this means you’ve got to manage the private lenders expectations and help them with the timing of their funds, particularly when Self-directed IRA’s are involved.

I’ve found that giving a prospective or new private lender a detailed time line or their own “investment calendar” will give them the guidance needed (along with your words) to get the ball rolling and have funds available when the closing is ready.

Look for the Opportunity

There’s a ton of capital out there on the sidelines and actively invested that you can tap into. Keep timing at the top of your mid and you’ll better be able to seize opportunities as they present themselves.

Event timing with: retirements, rollovers can be especially beneficial. Recent or pending retiree lists or IRA holders at specific ages are good targets. Empty-nesters who are looking for second careers or businesses can be good joint-venture partners. After all, timing is everything.

-Happy Investing

While this may seem a little bit simplistic, I assure you it is not.

Why?

Because working with self-directed IRAs can be a real challenge. And, depending upon the IRA company you are working with, it can be a total nightmare.

The reason is this: your private lender is going to need a certain level of involvement. The more involvement they have, the more the timing of the fund movement is out of your control. Not much you can do there. However…

Problems emerge when all does not go smoothly in the IRA setup, transfer and funding.

You see, SD IRA’s are a 3 part process.

First the investor must establish an account to receive funds into. Then, they must transfer/rollover/fund the account. Next comes the placement of the funds into your deal (note or equity, depending).

Usually the opening of the account is the easiest part. Simple application and pay a processing fee.

The next two parts are where it can get tricky….The rollover/transfer/funding of the account comes next. I always try to get my private investors to liquidate the necessary funds at their current custodian and transfer the cash proceeds to the SD IRA company. Try to avoid ‘rollovers’, where the private lender is cut a check from their old custodian and they have 60 days to reinvest it in a tax-deferred account. This is a real pain because it takes long (for the mail to arrive and the check to clear the new SD IRA company). Plus, the old IRA company might withhold 20% of the proceeds in taxes, which further compounds problems.

If the investor is funding their account brand new, fine. The only (potential) problem with this is the amount. For new funding, the annual contribution amounts will apply and you won’t be looking at very much capital.

But I can’t stress enough the importance of learning how this whole process works. It will do wonders when you sit down to present your opportunity to the private investor and you will further establish your positioning and credibility. Incidentally, if you read my last post about Positioning, where I encourage you to position yourself as an expert to your private investors, SD IRA’s are a huge opportunity where you can do this. Very few people know about this and you can use it to your advantage.

One way to learn on the fly – baptism by fire – is to set up your own self-directed IRA account. Go through the entire process yourself. Even if it is just $1,000 (or less) and you loan your money to another (trustworthy, of course) real estate investor. You can get a good return on your money and you’ll know first hand what it’s like to go from start to finish.

Frankly, I think this is the best way.

The other way is to go through the process with your private investor. You must know some of the in’s and out’s, but you’ll just be taking it one step at at time. You’ll want to call the IRA company in advance of the next step and speak to an actual rep about what needs to be done. Don’t rely on webinars or the online/paper instructions. These are never adequate and all I have seen fall woefully short of giving you the info you need for a good and seamless transaction.

Another thing you should be conscious of doing is managing the private investors expectations of the process. They are going to have slightly more involvement in getting things going than they would if they were opening up an online stock trading account (b/c the paperwork for that set up is largely automated and the SD IRA is not).

I often get asked to recommend self-directed IRA custodian companies and I have, in fact done this in my book and private money getting system. However, I have stepped away from this in recent months as the service levels have deteriorated horribly at one prominent self-directed IRA custodian. In two weeks I had two major private investor issues to resolve with them and it was a complete breakdown of communication. Nothing was done on the custodian company’s part to provide anything resembling good service. The reps were ignorant of even the most basic of investment concepts. Seems as though they are trying to become more profitable by skimping on good help. Never a good idea.

I digress…

I’m looking at new IRA custodians and I will be trying a few one’s out in coming months. Of course, I’ll keep you posted on any breakthroughs.

And nowhere is the “battle for the mind” more important than in getting private individual investors to fund your real estate deals.

In fact, I believe it is the most important thing.

“Battle for your mind” was a term coined by marketing experts Al Ries and Jack Trout in their famous book Positioning. This book is a must read, by the way. If you don’t have it, go and get a copy as soon as you are done reading this.

What is positioning and why is it so important to raising private money?

Since I’ve covered this subject before, I won’t belabor many of the basics. My goal today is to give you some solid positioning tips you can use right away to help your case in getting funding.

Suffice to say, positioning is how your prospective investor perceives you, relative to other, often similar products/services in their mind. It is more than “who’s the #1 brand” which is the pink elephant goal of Madison Ave. marketing managers. It’s about the real estate you occupy in your prospective investors mind.

Think about it: whom do you think of when it comes to your own investments?

Do you think of a financial planner friend of yours?

Do you think of a big national company , like Fidelity or Merrill Lynch?

According to Ries and Trout – and true in my experience – there are only a few companies/people that a prospect can have on any given product category “ladder” in their mind. And usually the company or person that is on the first rung wins big.

Hint: this means you should begin seriously considering what your prospective investors want from an investment and from people they do business with.

Are there any holes in what the big firms offer?

It is vitally important that you occupy a space of importance, relevance and value to your prospective investors.

To do this you must make a regular, conscious and concerted effort to put yourself in a position of authority and influence to your prospective investors.

There are some real estate agents that successfully position themselves as either: vacation home experts, investment property experts or first time home buyer experts. They go about touting themselves as focusing on this particular niche. They provide information and resources that are relevant to their particular market. Then, when someone thinks of buying a vacation home, they think of the ‘vacation home agent’.

Pretty simple.

Very effective.

Financial planners use this as well. Some in this field wisely focused on “estate planning” or “retirement rollovers” and went about doing those activities which were congruent with being an expert in this area. This helped lower sales resistance (or eliminate it altogether) and provided a big boost to their businesses.

Your Plan of Action

It seems like the common theme from the examples above is a focus. A focus on how you want to be perceived. Another common theme I’ve touched on is expertise.

For my money, there is simply no better way to quickly raise private money than to position yourself as an expert in real estate investments.

So how can you go about doing this?

Actually, its a lot easier than you think.

First of all, experts write things. Can you think of someone you consider an expert who has never written or published anything? There are probably very few.

So….start writing something of relevance to your prospective investor market about real estate investments. Write about: taxes, the market direction, interest rates & mortgages, passive income, diversification. The list is endless.

Where do you write it? On a blog and newsletter.

Again, very simple and effective.

Secondly, you should shore up what I call “holes in congruency.” In a nutshell, this means you should make sure every business related action you take fits with your goals.  This means wearing business professional attire. Getting a business card with a different company and/or title on it that promotes & enhances your position as an expert. Stop posting random things on Facebook – post what make sense for the position you want to have. Remember, prospective investors are probably able to view what you write.

Third – send something in the mail. People love getting (non-junk) mail and they like it even more when it is something helpful to them. This has been a very effective technique for me. Copy & clip an article, send a letter of introduction, send a newsletter.

But what if I’m a Brand New Real Estate Investor?

Perfect. You aren’t jaded and you have tons of energy and a fresh look. This is perfect for raising private money. Remember, if you’ve immersed yourself in your market at all, you probably know more than 99.99% of all non-real estate investors. Work with your fellow investors and some trusted agents and get a pulse for the market. Read the paper. Get a copy of the Wall Street Journal and read it (especially Wednesdays when they publish “The Property Report”).

You will soon have all the knowledge you need to position yourself as an expert – in your niche – to prospective investors.

A Word of Caution

Should you try to occupy the top rung on the ‘investment’ ladder in your prospects mind?

No.

This probably isn’t feasible.

Why?

Because too many other companies have put money, time and effort into bombarding your investor prospects with their messages. Bright new shiny objects everywhere they turn.

Even if you do occupy it for a time (unlikely), you’ll be unseated the next time the stock market shoots up 20% in a year.

You cannot and should not compete in a direct manner with the big boys. It is a tough sell to compare your private money offering to their investments with a big national brokerage.

This is why it makes me cringe when I hear real estate investors bad-mouthing “traditional” paper asset investments. Never bad mouth any previous investment decisions your investor has made.

Position your offering as a different from stocks/bonds/mutual funds. True diversification. A transparent and tangible asset. There are so many benefits to placing funds in a private real estate placement. I’ll bet you never took the time to write them all down!

Positioning in a huge power in raising private money. Once you win that piece of real estate in your prospective investors mind, you will stand to gain a windfall of capital. Not to mention referrals for additional investors and new business. New opportunities will open up.

Stake your claim.

-Happy Investing.

“I’m going to keep my money in CD’s…”

“You’ve never done this before?! Ummm…”

“My lawyer says this isn’t a good idea…”

If you’ve ever heard a prospective investor say one of those things to you, then this is one of the most important messages you’ll ever read.

Here’s why:

I’m going to share some common (and blatant) mistakes that real estate investors make when raising private money. Once you know these pitfalls, you’ll have 80% of the game won.

Mistake #1:Waiting until you have a property under contract to talk to private investors

Mistake #2:Having marketing materials that talk all about your company and do not focus on benefits for the investor

Mistake #3:Not listening at least 5 times as much as you talk when you are communicating with potential investors

Mistake #4: Not asking enough questions of your private lenders

Mistake #5: Pursuing somebody to lend their only $50,000 to you

Mistake #6: Not getting a written commitment from you lender once they say ‘yes’

Mistake #7: Poor (or zero) follow up with potential lenders after points of contact

Mistake #8: Offering terms that seem “too good to be true”

Mistake #9: Not building unshakable credibility

Mistake #10: Not covering your behind from a legal standpoint

Mistake #11: Using a ‘broadcast’ marketing strategy

Mistake #12: Using a one-dimensional marketing approach

Mistake #13: No flexibility in your deal structuring

Mistake #14: Bad mouthing the stock market as an investment to your investor’s face

Mistake #15: Improper or lack of positioning yourself/business to private investors

Mistake #16: Making sure the lender thinks the only benefits to investing with you are rate of return

Mistake #17: Sending a direct marketing campaign to an untested list

Mistake #18: Poorly designed marketing materials/sales letters/website

Mistake #19: Being too aggressive/needy in pursuing a potential private lender

Mistake #20: Discounting the value of your own sphere of contacts in developing potential private lenders

Mistake #21: Trying to use one-step versus multi-step marketing

Mistake #22: Not knowing which problem you are solving for prospective private lenders

Mistake #23: Not providing enough of a value proposition to those lenders who are on the fence

Mistake #24:Being unprepared for a presentation to private lenders

Mistake #25: Not knowing the in’s and out’s of self-directed IRA investing

Mistake #26: Not knowing the basic tax impacts of various types of private money investments

Mistake #27: Eliminating your profits on deals by paying all of it to private lenders b/c you gave away the farm

Mistake #28: Not knowing basics of securities laws

Mistake #29: Allowing the potential lenders attorney to kill your deal at the 11th hour

Mistake #30: Not educating yourself on new changes in tax/real estate/investment/retirement laws so you can exploit to your benefit

By all means this is not a comprehensive list, either!

In coming days and weeks I will be going through each of these one by one so that you can better arm yourself for raising capital. A wise man once said: “just tell me where I’m going to die….and I won’t go there!”

-Happy Investing

A roadside “bandit”sign that read: “Earn 18% on Your Money – Call XXX-XXX-XXXX”.

You know what a bandit sign is…it’s one of those signs you write on and stick in the ground.I’ve used them before to market for houses (buying, selling and renting) but never for private money.

As I sat stopped in my car staring at this sign, I figured I’d give a call. And then, in spite of my curiosity…I thought better of it. Why didn’t I call?

Because I probably wouldn’t have been able to bite my tongue.

Sometimes I have a habit of saying what’s on my mind, even if it’s unsolicited. But, what could have caused my blood pressure to increase? What could have gotten me so fired up that even dialing a phone number was difficult?

Simple: these guys weren’t playing by the same set of rules I was.

You see, securities laws specifically prohibit open advertising to the general public (which a roadside sign would constitute) for offering a security. And…yes…any time you take money from somebody to invest with you in real estate it is deemed a security by Big Brother.

If these guys are allowed to put out bandit signs to get potential private money lenders to call them, why wasn’t I?

Admittedly, this is sort of like saying: “all the other people are going 90 down this stretch of highway…why can’t I?”

Damn it…I hate sounding like a whiner. And, I really don’t mean to. Frankly, at this time I have other ready means of raising private money than having to field calls from random strangers calling off of roadside signs. But, it’s hard to stomach a (potential) competitor who has no regard for the rules possibly get a private lender before you.

Or…worse…one of your private lenders calls them!

Alas, my private lender was calling them to give them a hassle and do some recon work for me (see, I did call them in an indirect sort of way). I have a very good relationship with this particular lender and have earned their loyalty over many years of providing great returns.

However, the fact remains that some people will break laws, disobey rules and basically do anything they want. It’s kind of like competing in a sport where you know the other guys are using steroids and you aren’t.

What to do about this?

The way I see it, you have 3 options:

1. Whine and complain – You can whine and complain to your wife, your friends and anyone who will listen about how ‘wronged’ you are. You can holler and scream that you’re the only one that has to play by the rules  and all the rule breakers are getting  ahead of you by breaking the rules.

The only problem with this option is that, even though it might feel good to you, it annoys everybody you come into contact with.

At the end of the day…nobody cares as much as you do. So, that brings us to….

2. Blow the whistle – You could be like Barney Fife and call a citizens arrest on these scoundrels. You could call the cops and complain about the sign nuisance (but this was likely already done by somebody else). You could write a letter to or call the state securities regulator and let them know that they have some rif-raff out here breaking all kinds of securities laws. And, you know what?

They probably wouldn’t care either!

Yes, it’s true. Blast it…those securities regulators are so busy chasing down Ponzi schemes that have already blown up and trying to monitor investment advisors and “bigger fish” that they will probably sit on your letter for years. Unless you know somebody that works at the Administrator or you know a local prosecutor who will make a call to the state attorney general on your behalf (not likely for bandit signs along side the road), then you might as well chalk up your complaint to shouting into the wind.

So…that brings us to option #3…

3. Go merrily about your business – Indeed. Yes, this is what I would do if I were me and saw private money advertising bandit signs alongside the road whilst on my way into work.

Honestly? Nothing. “Adam, you wouldn’t do anything?!” Surely you jest!

Nope. I would do nada. Zip. Zilch. At least about these other guys.

You see, I cannot control what they do, but I can control what I do. And…what I can do is happily go to work and improve my own private money marketing. I can improve my business. I can improve my positioning. I can call all of my private lenders and invite them to lunch.

Why? Partly because I admire the gusto to go out and put the bandit signs out in the first place. And, secondly, since these “bandit sign guys” are willing take an action, they must be willing to deal with the consequences. More than likely, they have less to lose than I do by breaking the law.

And, that’s ok.

There’s always somebody out there who is willing to lie, cheat and steal to get what they want. Doesn’t mean you can get what you want by doing things the right way. It all comes down to choices. You have them. I have them.

For the sake of fun, though, let’s say I forget about the legal aspects and just critique the marketing approach of using bandit signs to get private lenders?

Here goes:

• I don’t like the strategy of it. You’re targeting the wrong sorts of people with this  method. Bandit signs are a quick response and give pertinent information. It’s an impulse call. Most high net worth people (those likely to be private lenders) won’t be inclined to call from these signs as it will smack of a scam to them.
• Credibility is gone. By the sheer act of putting out signs asking for money, it makes it look like you need it.. This is cardinal rule #1 that you must not break in marketing for private lenders. You cannot be in a position of need. “Banks always lend money to people that don’t need it.” Have you ever heard that phrase? It’s a nice pearl of wisdom to remember. The person calling the sign cannot escape the thought that YOU were the ones putting them out. “If you are such a successful real estate investor that I should invest money with, why are you sticking signs in the ground at 11pm on a Thursday?”
• Bad response mechanism. When it comes to money and investing, people like to have something in their hands to think about. If you don’t hit the market with your bandit signs, all your marketing dollars are down the drain. It’s a ‘one shot, one kill’ deal or you miss out.
• Tracking. You don’t know which sign people are calling off of unless you have a separate phone extension or number for each sign. This makes it hard to know which areas are performing better than others. If you’re going to spend money on marketing, you should make it more trackable. Website might even be better with separate URL’s.
• It just plain seems desperate. Positioning in your business is everything. If you lose position and posture with your investors (potential investors) than you’ve lost the battle for their mind.

So, there you have the whole argument. Take and do with it what you will. Hopefully, you now know what to do when you see yellow roadside signs advertising for private money lenders.

-Happy Investing

First, go grab a big wad of cash.

(If you don’t have a big wad of cash, hop in your car and go to the ATM machine. I’ll wait.)

Now, once you’ve got this wad of cash in your hand, grab a lighter and set it on fire. If the flame gets too hot, throw the money into the toilet and then flush it.

Watch your money burn and then watch it go down the toilet.

In a small personal journal, describe your feelings as you do this.

End of exercise.

Why have I had you do this little exercise?

Because I want you to know what it feels like to needlessly burn money.

And that’s exactly what you’ll be doing if you aren’t careful buying into the latest fad out there for raising private money.

Maybe it’s not a fad.

Maybe you haven’t bought into it. Perhaps you have.

I”m talking about getting lists from public records of people who (supposedly) have made private mortgage loans. The idea is: you get this list and send them a letter asking them to be your private lender. The rationale is that the person you are mailing is likely to loan you money because they (again, supposedly) have made a private money loan before.

On principal, the concept of this is not all bad. I can see the logic, although it is a bit flawed.

However, like always, it is the implementation of the idea that counts -not just the idea.

And, the implementation of this idea that I have seen has been downright laughable.

How do I know this?

Because I have been the recipient of hundreds of these letters!

How have I done this?

Because all of my private mortgage lenders have my business address as their “draft & return to” address on their mortgages (this is the address that goes into public records as the private lenders address).

Why have I done this?

Precisely because I don’t want other nosy real estate investors learning who my private lenders are!

Hopefully you’ll take the same precautions with your lenders. Once you earn funding from a private lender, you don’t want them getting bombarded with letters from people all over the place promising them 20% on their money. First of all, it’s annoying to your lender to receive this mail. Second of all, let’s say one of these other real estate investors hires a guy like me to write a their direct mail campaign…now you’ve got a real problem because your lender might jump ship.

Ok….back to what I was saying…

This fad of buying a list of recorded mortgages (or trust deeds) is a pretty rock-headed way to do things. Even thought it’s been passed off as the latest and greatest.

Why does this method stink?

2 Reasons

1. Because you can get better mailing lists!

A good mailing list is an important fundamental in direct marketing. If you don’t have a starving crowd, forget about selling hamburgers. In terms of buying these private lender lists, you can do better than what you’ve seen on this.

Talk to a good list broker. Describe your ideal private lender prospect in detail (age, income, investing experience, etc.). If you can’t describe your ideal lender prospect, don’t even think about sending a direct mail piece. Why? Because it will miss the mark.

You can get mailing lists that have names of accredited investors who have over $1,000,000 to invest and who are actively looking (this is a big key) for direct participation programs (like yours) to invest in. You can find out more about them than you’d almost ever care to know.

Just about all of the mailing lists offered for this new fad are compiled lists versus lead generated lists. This is a night/day difference. Compiled lists generally stink.

2. If you don’t write good copy you might as well burn your money (hence the exercise a few moments ago).

I know I’ve said this before, but it’s worth mentioning again: never waste a chance to make a sale. Doesn’t matter if you’re selling in person or if you’re selling through mail or via internet. If you get the prospects attention (e.g they’ve opened your letter) then you have only one chance! Make it count.

Unfortunately, exactly ZERO of the mailing pieces I have received that were intended for my private lenders have had anything remotely close to resembling good copy. Most of it has been downright awful.

Here’s a snippet from one of the letters:

Dear Mr. Smith

Public records show that you recently loaned money on a private mortgage. I currently own a real estate investing business that buys and sells houses. You can lend money to me instead! I will pay a great rate of return and you can make more than you can in the stock market right now….

Blah…Blah…Blah

No, I am not making this up. You just can’t make this stuff up.

Please follow guidelines for good sales letter copyrighting if you’re going to do mailings. The old: AIDA format (attention, interest, desire, action). Make it about “them” instead of about “you” (e.g. stop using “I” and “we”). Use a headline. Etc.

While I applaud the effort to even drop the letters in the mail (most people are happier watching DWTS), I can’t help but to feel a little bit bad. Somebody got duped.

Hopefully now it won’t be you.

-Happy Investing

But I think I know you a little.

You don’t like to make people mad. The thought of having another human upset with you makes you uncomfortable. You like to resolve all conflicts and issues or you have a hard time sleeping. You like to be a people-pleaser and value when others talk highly of you.

How am I doing so far?

Good?

Don’t worry…I’ve just described myself, too.  It’s just human nature. You feel better when other people like you and say good things about you.

So what’s wrong with this?

Nothing…unless you want to: a. make a lot of money in business or b. raise capital for your real estate investing business.

Sometimes we have to get away from our natural tendencies in order to get results.

Let’s back up for a second…

There’s this one old country song that goes something like this: “Son, you’ve got to stand for something or you’ll fall for anything…”

I think there’s a lot more business sense in these song lyrics than even the singer may have realized. Why? Because “standing for something” is one of the most important marketing principles.

It’s called “positioning.”

Positioning means you can’t be all things to all people It means you’re going to have to rule out a lot of potential prospects so you can get to the ones that will invest money with you.

And you should put this right up there toward the top of your private money raising “to-do” list. Before you starting getting your website designed. Before you prepare your business plan. Before you even get your business cards printed.

What do you stand for?

Not in a patriotic way (although there’s no problem with being patriotic). In a purely business context.

If you want to get private money to buy real estate investments, you absolutely must stake out a ‘position’ in the mind of your prospective private investor. Otherwise, your message will bounce right off.

The worst spot for a business to be in is when they try to be all things to all people.

Naturally, as a real estate investor seeking to raise capital for your projects, you cannot be all things to all people. You can’t offer FDIC insured deposits. You can’t offer people the potential to triple their money in 10 days like a penny stock.

But you must take care to create a position in the mind of your prospective investor which puts you in your own category.

Want a tighter definition of “position?”

Here goes:

Picture your prospective investors mind like a grocery store. This is how the investor’s memory stores relevant information. There’s an isle for cereal. There’s an isle for condiments. And so on.

Your investors brain can only remember (on average) up to 3 brands or companies in any one category that they buy from regularly. All the other brands and companies are lost. Blanked out and forgotten.

Your “position” means exactly where your prospective investor sees you on their grocery store shelves.

Since Kelloggs, Post and General Mills  have all occupied the shelf space for cereal already in your prospects mind, it would be difficult for you to stake a claim in that area. After all, it would take major effort and time to dislodge a lifetime of messages which created this shelf-space monopoly.

If you had cereal to sell, a good option for you would be to create a completely new food category and then own the shelf space in that category in your prospective investors mind. This option would be a lot more profitable for you.

It’s the same with investments.

When your prospective investor thinks of investments, they most likely think of the big guys (Merrill Lynch, Ameriprise, Fidelity, etc.). And when you shout at them a message of “earn 12% secured on your money,” they are going to put you in the category of investments. Your shelf space will be limited.

You’ve got to carve out a position for yourself, so you can occupy space in your investor’s mind. From there, you communicate a strong benefit driven message.

It’s not as hard as you think.

For example, you could take the position (which I do) that the stock market is an evil, ugly and manipulated gambling mechanism not suitable for the average person to place their life savings. Here’s how I stake out a position in the prospects mind:

“7 Things You Financial Planner Isn’t Telling You – And How It Could Delay Your Retirement”

Simple. Straight to the point. Benefit driven.

I’ve told them a lot in one sentence, haven’t I? They know that I’m not a financial planner (e.g. lumped in with all of the other guys in their mind). They know that I have information they want (e.g. I’ve positioned myself as an expert). They know that I’m on their side. They know I’m no particular friend to the financial services industry.

In fact, it’s just as important that your prospects know what you DON’T do, as it is they know what you DO.

How you position yourself has a lot to do with who your prospective investors are.

If your prospective private money lenders are accredited investors (e.g. wealthy individuals), you might want to take the position where you are providing:

“an opportunity that investment insiders would kill for…”

For the wealthy individual, this type of position lets them know you aren’t just offering the “same old, same old.” You aren’t trying to manage their assets. You are a firm which has access to investments they cannot get anywhere else.

Bottom line: whatever you do, please take just a minute or two answer this question for yourself:

Why should my prospective investor listen to what I have to say?

If the answer you came up with is: “because I offer 12% returns” or something like that, then you’re being mentally lazy. Try harder. Come up with at least 3 unique reason why someone should do business with you instead of the next guy offering to manage their money.

• Do you specialize in a certain type of investment (e.g. apartment rehabs, mobile homes)?
• Do you offer a special type of tax advantage?
• Do you offer anything else in addition to funds placement?

The worst thing you can do when raising private money is get lazy and start down the same old track of just talking returns. While this may well be the deciding factor for the prospect, when you give them something else to go on they will put you in a different category and you’ll have a much better shot at the dough.

-Happy Investing

For today, I’m going to leave out the legal “nitty gritty” – as that could take up a few pages in itself. Instead, I’m going to focus on the practical aspects of it.

First, I need to get something off my chest: if you want to use the internet to attract prospective investors to your opportunity, please stop using the garbage industry slang “…X% secured by real estate…” as well as using the term “private lenders…”

If you’re doing this right now, whack yourself on the head with a rolled up newspaper. Bad dog. Ok, you probably want to know why you shouldn’t do this…you probably want to know why, considering there are a lot of companies who will build “custom private lender websites” and the like for a pretty penny.

It’s all about… getting results instead of spinning your wheels.

Attracting private investors to your opportunity is all about the right marketing. The standard dogma that somebody trumpets about how you should broadcast “x% secured by real estate” really doesn’t hit home with many prospective investors. Plain and simple: people that will invest with you simply aren’t searching for this stuff on the internet. Want to know who is? Other real estate investors, that’s who. People who want to get the same private money you do. You don’t want this kind of traffic on your website.

Not matching your message to what your investors are looking for and what interests them is a mistake. This is akin to a computer maker leading their marketing with the fact that they offer a full 1 year parts warranty. Nothing wrong with offering the warranty, it’s just that people don’t look for that when they’re looking for computers.

As far as using the term “private lenders” goes…well, I can say that veritably NONE of my private lenders think of themselves with that particular moniker. They think of themselves as “investors” and, typically “partners”. Even though they may very well be private lenders, they don’t think of themselves that way. It’s a term we use in the real estate investing industry that the general investing public is unaware of.

Also, please stop trying to close the deal right on your website. Most of the real estate investors website that I have seen pretty much brow beat the visitor over the head with a sales pitch without really showing the benefit for the investors. There’s no compelling reason to do anything. The best of these sites I have seen (which my coaching students have solicited  my help on as well as randomly looking once in a while via Google search) simply asks the investor to submit information to receive a prospectus.

Not a great call to action.

I mean, why should the investor request a prospectus, when they don’t know anything about how investing with you works.

These sites that say “become a private lender!” make me want to vomit. While there may be isolated cases of results with this, I haven’t seen any evidence of long term success using this approach for purely online generated leads (via organic search, link or landing page from PPC or email). This “become a private lender” message simply doesn’t resonate well with the demographic of your prospective investor target.

The only way this type of approach works, is if you have established yourself in another sphere as an expert, and the hits to your website are being funneled there from other sources that pre-qualify the visitor.

If you are going to generate traffic to an online website, your website should present an extremely unique and compelling story. You should explain (in simple terms) the benefits you provide your investors. You should make the entire purpose of your private money attraction website to generate qualified leads and build an email and physical mailing list. Your website should be the first step in a multi-step, qualifying private money attraction campaign.

Since I rely so heavily on offline promotion (direct mail, space/print, etc.), I’m often asked what “makes me an expert” in online marketing.

Well, I don’t hold myself out as an “internet marketing guru” (though I’m sure my experience and pure profit results in this sphere dwarf by many times what some of these alleged  internet “guru’s” have done). However, I do spend close to 5-figures each month on online marketing (I pay Google a lot of money, but I also make more off of them) and I’ve spent a great deal of time over the past several years honing my approaches. Testing to see what works and what doesn’t.

You should never rely on just one way to generate interested private investors. That would be like me telling you (if you owned a retail clothing store) that the only way you could get customers in your door was to advertise in the yellow pages. Not true. If you did this, you’d be dead in a week and liquidating your inventory. If you did own a store, you’d use every profitable means possible to get customers in your door.

Same with private money.

If you rely on just one way to attract investors – say, if you solely relied on the internet – then you could expect about the results you’d get. Now, if you’re really, really good you can laser focus like this. Personally, I want to raise private money quickly, so I employ a variety of tested approaches. You should use an integrated approach combining online, direct mail, networking referrals and others to raise private money in a hurry. You results will be much better and you will lose out on less deals this way.

Use your website as a lead generating tool. If you don’t have the right sequence in place, you shouldn’t’ put up a website. Take your time and do it right. This way, you won’t drop the ball with a good opportunity.

-Happy Investing

Have a “Power Team” of professional advisors if you want to build a big, successful business.

Robert Kiyosaki often talks about how his Rich Dad would meet with his attorneys, accountants, insurance people, bankers and other essential business associates/service providers to help him prepare, plan and execute his vision of building wealth.

Since Rich Dad, Poor Dad came out in 2000, I’ve noticed an increasing trend of people of experts advocating that you have a your “team” put together. That is, in order to build a successful business, you should have on your speed dial:

• an attorney – a real estate attorney if you’re a real estate investors
• a corporate/contract attorney
• a bookkeeper (to keep your records straight)
• a CPA or tax attorney
• an insurance agent/broker (to help you identify and reduce risks)
• a banker
• a mentor or advisor

There are probably some others that I’m leaving off this short list.

One big question is: is it really necessary to have this power team to build a successful business?

In short: my answer yes. Butt…

First, let me tell you the cynical side: a story about how an attorney blew up a private money deal and cost me a boatload of profits.

About two years ago, I was beating the drum and raising a ton of capital. A couple of potential private investors came into my office one day, sat down in our conference room and I laid everything out for them. These investors were already qualified and had indicated in multiple ways that they were ready to pull the trigger and just needed to see the details.

During my meeting with these investors, everything went great. Couldn’t have gone better. They signed an investment commitment for and we were scheduled to close a deal the following week.

They walked out of the meeting with my company’s disclosure documents, along with other required information for them to review before funding the deal. When they asked if they could have their attorney review the materials, I said: “no problem, I encourage you to do so.”

Big mistake.

Flash forward to the following week, with about 72 hours before the deal was supposed to close. I called one of the two potential investors and I asked him if everything was ready to go. He hesitated for a second and then he told me that his attorney had advised him that “…this deal wasn’t such a good idea.”

What?!

Needless to say, I was pretty surprised by this. Shocked almost. These investors met the criterial of “accredited” by SEC definitions. They were given the proper disclosure documents, a copy of our business plan, they had seen my company’s financial statements, tax returns and bank statements – along with a huge stack of profitable deals that had been closed with other private investors funds —AND they had also been given references to other private investors who had invested with me that they could call for a reference.

I just wasn’t sure where the disconnect was. What had this attorney seen that caused him to advise his clients against investing with me. The investment didn’t even represent 5% of the net worth of the investors and, it was a secured mortgage loan with about a 50% LTV.

What the heck?!

I didn’t want to lose my cool with the private investors, so I asked if we could do a conference call with their attorney. The call was arranged for the next day.

Dialing into the conference call, I wasn’t sure what to expect. Was this attorney crazy? Did he need a reason to justify his billable hours to his clients?

I soon found out the answer.

It turned out this attorney (who’d been a member of the bar for at least 20 years) was ABSOLUTELY CLUELESS about what he was advising his clients on. During the call, I found out that this attorney didn’t have any specialty or expertise in real estate, corporate or securities law. Turned out he worked in another field of law.

How could this guy possibly, in good conscience, advise these prospective investors on anything related to a real estate investment?

Well, I never did find out the answer to that question – a the conference call ended abruptly…right along with my private money deal.

Flush-right down the drain.

I’m talking about $250k in private money that was 2 inches from the goal line. At the time, that amount of capital could have generated about $100-$150k in annual gross profit for me.

And, I’m not gonna lie – that night…I came home and had a stiff drink. Johnnie Walker Black Label.

The sting wore off over the next few days and business went forward. I raised a lot of money right after that incident and, truthfully, I don’t think about it all that often…Except…

…when people get on a real high horse about how important it is to have a stable of professionals on your “power team.”

I still think it is a good idea to have qualified professionals who are on your ‘team’ —–BUT…BUT…BUT…BUT…BUT…

Be VERY VERY careful about who those professionals are. Because, the attorney in the case of the two potential investors with me, cost his clients about $30,000 per year in passive income. I know for a fact that those two investors kept their money on the sidelines and they missed out on a nice opportunity to make money with their money. Some “service” they got from their attorney.

As you may note: it’s a lot easier for a professional to kill a deal like this than to advise their clients to invest in it. The professional is “safe” by saying “no” and they face the risk of losing a client if the client invests and loses money. It’s a matter of incentive. Plus, the professional is going to have their guard up against anything they perceive as out of the ordinary. Strange, considering the attorney’s and CPA’s who happily send their clients to get slaughtered in the stock market by referring them to their financial planner buddies.

Back to the task at hand: I do think it’s important that you have a GOOD and COMPETENT advisor for your particular needs. But, be extremely cautious in whom you select to advise you (or your private investors). Make sure your advisors know exactly what you do in your business and what your specific needs are. Interview many before you pay out even one red cent in a retainer.

If you think that a referral from Uncle Joe to his “tax guy” is going to fit with your real estate investment goals, better think again. After all, it’s YOUR business and YOUR profits that are on the line.

And…this rings especially true with the most important aspect of law concerning raising private money: securities laws. Make sure you hire a securities attorney that has dealt with small company offerings and exempt transactions – and, for real estate in particular. Many securities attorney’s know the SEC codes but they don’t know much about exempt transactions for small, private companies. Most corporate attorneys are completely clueless about securities laws or they have a vague recollection of them from their law school days. Don’t let any attorney tell you they can handle everything for you. They can’t – it’s just more billable hours. They are in business to make money as well, but you have to be your own advocate.

Here’s something else…

You should encourage or at least mention, to your private investors that they can/should review your offering documents with their advisors. If a prospective private investor asks you if they can have their advisor look over the materials, your answer should be “yes.” But, here’s what you do when that happens. Offer to meet with the investor and their advisor or, at the very least, set up a conference call. You should be comfortable in spending at least a few minutes walking the private investors advisor through the details of your deal. It could go a long way in smoothing the way for the deal to close without snags.

Ok, there’s the bell. Lesson over for today. Commence butt-kicking and, as always…

-Happy Investing

If you listen to some “experts” enough, you’d probably come to the conclusion that you should never bring more than one private investor in on a particular deal.

In fact, if you listen to enough “experts” on enough subjects, you might not want to leave your house in the morning for fear that the sky would fall.

Thankfully, you’re not a henny-penny and you don’t think that the sky is falling.

With private money, pooling means bringing multiple private investors funds together, combining those funds and using them for a real estate transaction (actually, there’s probably a more lengthy legal description, but this is what it means in plain English).

So what’s the big deal?

Well, the securities regulators want to make sure that you aren’t misusing your private investors money. They want to make sure you aren’t taking money from one person to pay off another person. They want to make sure that you are making proper disclosures to your investors about where their money is going and how it is being used. They want to make sure you file the proper paperwork with them to let them know what you’re doing.

Whew! All of this sounds like a whole lot of big brother, doesn’t it?

Yes, it probably is for the average real estate investor who wants to raise $100k for their first flip deal.

Fear not.

You can handle the pooling issue quite easily when you know how.

Let’s start from the top and I’ll tell you how I personally avoid potential problems with pooling.

1. I don’t bring multiple investors in under a single collateralized investment. What this means is that I don’t put more than one investor on a mortgage. I don’t form a company for my investors, put them all into a company and have that company loan me money for a deal where I give that company (made up of private lenders) a mortgage or lien. It creates way too many potential headaches. If two private investors both want a senior lien position, I will give one of them a first mortgage in exchange for a lower interest rate and the other will get a slightly higher interest rate for a second mortgage. As long as the LTV is within a good margin, there’s should be no issue with there being significant principal coverage in the event of a worst case scenario for the lender(s)
2. I use equity investors – the pooling issue is easier to overcome if you bring private investors in as equity partners in the deal. That way, each investor owns a % of the company in proportion to the funds invested. The investor funds aren’t commingled together under one particular security. The security being offered is a unit interest in an LLC or LP. The disclosure documents and other offering paperwork provided to the private investors show them what their investment is. The partnership or LLC paperwork spells out exactly how distributions are handled and whom will handle them in the event that the manager (me/my company) fails in their capacity to perform or is incapacitated (dead/injured) and cannot perform duties. I know this one sounds complicated – especially for beginners – but it’s really just a matter of common sense and putting yourself in the investors shoes
3. I use accredited investors as often as possible – you’re life is a lot easier when you bring in capital from investors for which a $50k or $100k investment is not a large % of their net worth. This way, you don’t have to worry as much about redemptions and you can have more breathing room operating your business
4. I make the proper disclosures and file the right documents – it goes without saying that you have to be compliant with your state (and federal) securities laws.  I use Reg D exempt securities offerings (for the most part) and mostly Reg D 504 to be more specific.

Each time I touch on this subject matter at all, I always have to tell my readers that I’m not an attorney or tax professional and that I recommend everybody have a securities attorney that they can use, as well as other professional counsel. It might sound like standard mumbo-jumbo, but it’s just plain true when you think about it.  It’s foolish and unprofitable to pretend like you can do everything on your own in real estate and raising other people’s money. Don’t be a lone ranger.

Now if anybody tells you that you cannot bring mutliple investors in together on a deal, you can tell them that they don’t have their facts straight. You can (and will often need to, as your business grows) bring multiple investors together to fund a deal. As long as you handle things the right way, you’re in no danger of anything except proabably making a lot of money for yourself and your investors.

Private money is the best way to acquire just about any type of deal out there (unless you are already wealthy)… and right now cash is king and will hold the crown into any kind of forseeable future.

I always laugh when people tell me that private money isn’t that important because the credit markets are improving (FUNNY!) and they feel as though they can haggle with a bank who will let them steal a commercial property off their books for 50 cents on the dollar and THEN hold the paper on that same  deal, while at the same time coming with zero cash or nor management record.

You could spend a whole lot of time doing those types of strategies and get maybe one deal every so often (if you’re lucky – but, if you were that lucky, why not put a chip down on the roulette wheel?) or you could spend a little time raising some real cash and build an ongoing system of acquiring properties with none of your own money that put you in total control.

As I always say, private money isn’t for everybody. It’s only for those real estate investors that want to be at the top of the food chain eating steak while their competitors squabble for the table scraps.

-Happy Investing

Here’s the “meat and potatoes” of the conversation:

Prospective investor (PI): “I’m a bit worried about the stock market, it’s gone down a lot in the past few weeks and I’m thinking of taking some money off the table there.“

Me: “I hear you…it’s hard to understand what makes the market fluctuate so much, especially the extreme up and downs. Are you more focused on preservation of wealth now versus accumulating?”

PI: “You could say that. I’ve got enough to be comfortable on, but I’ve always focused on increasing my means. Your information says that you can get my money out for respectable returns. I think I’d like to give it a try, but I don’t know if I want to tie my money up for very long.”

Me: “Yes, we can definitely place your funds into a real estate investment that you’d be very comfortable with – something that would give you some stability in your portfolio. Now, as far as the time frame for investment, can you tell me what you have in mind?”

PI: “I’m just worried that the market may start shooting back up. If I pull funds out to invest with you, then I might miss out on a big rally.”

Me: “I understand.”

PI: “The last time I pulled a bunch of money out of the market, it went right back up two months later.”

Me. “It’s hard to predict and time it right all the time.”

PI: “Yes, they say you can’t time the market, but it sure seems like people do get it right and then you’re left out of the bull run.”

Me: “You’re right. I’ve seen it work out for some people quite nicely. On the other hand, I’ve seen it go sideways, too.”

PI: “I suppose…that’s true. Nobody’s got a crystal ball.”

Me. “Mr. Investor – why don’t we start with one of our short-term higher yields…where you can invest with us and receive an annualized yield of 11% but you will have the option to re-invest and roll-forward  every 4 months?

PI: “Ok….how would something like that work?”

Me: “It’s pretty simple, really. We like to keep things as simple as possible.”

PI: “Simple is good.”

Me: “I agree. Now, if everything makes sense to you, is it fair to say that you’re comfortable with the minimum required investment of $100,000?”

PI: “The money is not the issue at all. I can call my broker tomorrow…or even today. I need to talk to him anyway.”

Me. “That would be fine. Here’s how the investment would work: you would place funds with us in a private placement. As you’ve seen in the literature…

–End conversation snippet–

I went on to explain how the investor could place funds with my company for our short-term flip deals. Wherein, they would be a secured mortgage lender. They would receive a promissory note which would pay monthly interest for 4 months. At the end of 4 months, the property will be sold and their principal amount returned. At that time, they would have the option to re-invest and place their funds in another deal. This is how it was structured as a “short-term yield.”

If you are paying close attention, you can see that there are some very important pieces to the puzzle that I put together here:

1. I accommodated the investor – but kept it win/win. My marketing pieces tell investors that I have a 3-5 year time horizon for placing funds. This helps shake off a lot of people who really don’t have the means to invest. If the investor expresses a strong desire to place funds, I will everything I can to make it work. Why? Because I want to get them invested. Once they place funds, I will dedicate significant time to showing them how crazy it would be for them to invest anywhere else. More on this in a minute.
2. I qualified the investor – re-confirmed they have minimum funds to invest and they those funds were relatively liquid and ready to go
3. I did not “negative sell” or downplay their investment philosophy. Even though I don’t agree with trying to time the stock market, etc. I did not say anything to throw salt in the wound or rub in how great my investment was compared to the alternatives. This fits nicely with my model of presenting private money as a nice menu choice for investors instead of browbeating them and telling them they should eat at the new exotic restaurant in town. It’s easier to tell them they should try the lobster instead of the hamburger on the same menu where they like to eat.

More about #1 (above): I really want to get the investor committed and used to the idea of having their funds placed with me. After the closing, I go way above and beyond what any reasonable (or unreasonable) person would expect in terms of the proper care and feeding of investors. They will feel like they’re being treated like royalty and I will then turn on the referral and supplemental money machine (more money from existing investors as well as referrals from those investors).

Some of you might wonder how this applies if your business model is buy & hold for SFH or commercial. Honestly, I think you can apply it just the same, albeit with a slight twist.

In the case of an apartment building, you can simply tell the investor that, if they commit the required funds, that you will allow them a special liquidation preference in a certain period of time. This puts a little more pressure on you to replace those investors funds if they want to redeem, but it’s still possible.

For longer term projects, the “short-term” approach won’t work as well. You can, however, still use the qualifying mechanisms and “non-negative sell” techniques to great success. If you have a longer term project and the investor meets my qualifying criteria as: “ready, willing, able” then try the following:

• counter with smaller investment minimum
• counter with preferential tax treatment for distributions (capital gains as opposed to profits in the partnership distributions for an equity partnership – LLC or LP)
• offer escalating returns commensurate with time invested (e.g. 10% for up to 12 months, 12% for up to 18 months, 15% for up to 24 months) – if your project can support it. This is how many hedge fund structures are set up, except the incentives usually flow to the managers versus the investors

RRRRRRRRRRRRRIIIIIIIIINNNNNNNNNGGGGGGGGG!

There’s the bell…class dismissed for today. Please go forth and continue kicking butt.

-Happy Investing

It wasn’t that long ago (at least it seems like it wasn’t that long ago) when I started hitting the private money trail. At the time, I thought that anybody would be crazy to not sit down and consider investing in a private money deal. Then, I realized that I was crazy.

Why?

Because I was assuming that people knew what I knew. I was assuming, that the average investor that I was talking to had been to all the real estate seminars that I had, read all the books and been “up to speed” with what was possible in the marketplace.

Wrong. Wrong. Wrong.

This wrong-headed thinking cost me a lot of dough. It cost me a lot of blown appointments.

It’s just plain dumb to expect your private investors to know what you know. Often, they don’t even know much about investing – they have a financial planner or CPA or somebody that guides them. Therefore, it’s your job to first educate them. I advise providing educational materials before you even sit down with somebody the first time. This will save you a lot of frustration.

5 (Critically) Important Things…

Last week, I spoke at a real estate investor association in Macomb County, Michigan. I was teaching real estate investors 5 of the most important details with getting and using OPM (other people’s money) to fund their deals. One of these top 5 was: marketing for private money. Actually, to be more specific, correctly marketing for private money.

You see, you just won’t be able to get private investors if none of them know about your opportunity.

And…there’s another VERY important – and often forgotten – aspect of correctly marketing for private money and that is…positioning.

I’ll tell you, there’s a lot of bad “poison info” out there from people who will tell you (from the front of a room no less) that you can simply get a list of people who stuff money under their mattresses who will place money with  you.

Without getting into too much detail, I will tell you from blood and guts, in-the-trenches, getting-my-teeth-kicked-in, experience that people who love to stuff their nest-egg into CD’s, savings bonds and under their mattress ARE NOT your ideal target investor.

You have to go after those prospective investors that have ample funds already invested in: stocks, mutual funds, bonds, commodities, REIT’s. And, you have to go after people that make good money. The $50,000 per year household makes different decisions than the $150,000 per year household. Just a fact of life. Don’t completely ignore the $50,000 household, but don’t focus a lot of time on it, either.

Because it’s ideal to target investors with means and funds currently invested, you then need to position your investment as a benefit-filled alternative to some of what they are currently invested in.

Positioning is all-important in marketing.

And, in positioning your private money investment, you must take care to establish two things:

1. You – as an expert and credible source of information

2. Your investment – as the proper allocation for part of somebody’s portfolio.

For now, I will leave #1 (above) for a later post and focus on #2. Mostly because I think #2 is a bigger challenge for more real estate investors looking to raise private funds.

You should make a concerted effort to position your investment as  a good “allocation” of your prospective investor’s currently invested assets.

Since there are so many ways you can do this (at least a dozen that I have successfully implemented for myself and my students), I want to just focus on one very basic way for today. This simply involves creating a table comparing and contrasting stocks, mutual funds and other investments with your private money investment deal.  Here’s an example:

Benefit                           Private Real Estate Placement         Stocks               Bonds            Mutual Funds

Principal coverage                                Yes                                          No                Maybe                 No

Peace of mind                                          Yes                                         No                    No                     No

Ease of investing                                   Yes                                      Maybe                No                      X

Tradeable                                               Maybe                                   Yes                   Yes                   Yes

Price fluctuation                                    No                                     Volatile          Volatile             Volatile

Fees & Commissions                              No                                          Yes                 Yes                     Yes

Etc….

Yes, this is a very basic and simplified example, but if you aren’t using a tool like this, you are really selling yourself short.

Because private investors “don’t know what they don’t know” – and because one of the most important roles you have in bringing in private money (via marketing) is to educate – you must take care to present easy-to-understand information that is digested quickly and taken to heart.

Present this information to your investors before you meet them. Design your marketing pieces to position your investment as simply a new option on the menu. You don’t want your investors thinking that they’re eating at a new an exotic restaurant. You want them thinking (correctly) that their menu of choices has simply been updated. They now know they can “choose” to invest with you.

Make your private investors choice an easy one.

-Happy Investing

Before you answer, here are a few popular choices:

• Run around like a crazy person and tell people that you’ve just discovered the second best thing to the lost city of gold
• Slap a business plan together and crunch numbers on a spreadsheet until you’re blue in the face
• Start posting ads on real estate message boards or online classifieds about your deal of the century

If I were you – I would not choose any of the above. Even though having a business plan is important to A: running and successful business and B: getting funding, I still wouldn’t rank it as numero uno on my to do list if I had to start all over again at zero with no private money.

Knowing what I know now about getting private lenders and equity investors to fund my real estate deals, the first and most important thing I would do is….

Establish a Unique Selling Proposition (USP).

I think a USP is perhaps the single most important thing you can do for any business when it comes to marketing. And, make no mistake, raising private money is all about marketing. Why? Because if people don’t know about and do not see the benefits of investing with you in a way that matters to them they will not invest. Period.

Ok, so what exactly is a USP?

Great question.

A USP is  a way of presenting your product or service which completely differentiates you from any and all competition while at the same time promising a huge benefit to the customer that moves them to action.

Here are some examples:

“Hot, Fresh Pizza to Your Door in 30 Minutes or Less – or It’s Free.” (Dominos Pizza)

“When it absolutely, positively has to be there overnight.” (Federal Express)

“Melts in Your Mouth, Not in Your Hand.” (M & M’s)

Now, before you think that I’ve totally lost my mind – I mean, you’re thinking ‘how does this relate to real estate investing?’ – just consider this:

There are thousands of companies that are competing from your private investors funds. Banks, Mutual Fund Companies, Insurance Companies..you name it. If you think that the first thing your private investor thinks about in the morning is how and where can he find a private mortgage investment – you are dead wrong.

Every time your prospective investor picks up a newspaper, there’s an advertisement for Fidelity Investments, T Rowe Price, ING, and the list goes on and on.

If you cannot crate a unique and compelling reason (beyond: “earn 10% on your money secured by real estate”) then you will have a much longer and tougher road to raising private funds.

That’s my rationale for establishing a USP as the first thing that I would do if I had to start all over again at 0 private money.

How can you get started doing this? Actually, it’s a heck of a lot easier then you think.

First, start with the benefits of investing with you. I wrote about how to find the benefit versus the feature of your private money investment in a recent post, so I will let you read more about it there. Suffice to say, your USP must contain a great benefit for your investor that also makes you different from the competition.

I will try to construct one right here for an example. Keep in mind that this won’t be  a perfect one but it should get you started in the right direction. Ok…let me see..

Let’s start with some benefits:

• no fees or commissions (unlike mutual funds or stockbrokers)
• build wealth faster
• inflation hedge
• principal protection
• peace of mind

This isn’t an exhaustive list, but it gets us going in the right direction. Now, how can we translate some of those so our offering is something unique and extremely beneficial to the potential investor? (keep in mind, that even if your product or service isn’t 100% unique on it’s own, you can present it and offer it in a completely unique way)

How about….

“Double your money every 6 years without losing a wink of sleep.”

Not bad. I don’t hate this one. I’m not sure I’m in love with it yet. It’s a little wordy..but it could easily get the job done.

Want to know how I broke this down?

First of all, “double your money in 6 years” is ONE HUNDRED MILLION times better then saying “12% interest”. One is  a feature and one is a benefit. Next, saying “without losing a wink of sleep” is better then saying “peace of mind”, “no hassle” and “preservation of principal.”

I’m pretty sure that if you used this message that it would land just fine.

When it comes to USPs, all you have to do is a little role playing. Have somebody ask you: “why should I do business with you?” Your answer should then be your USP. Think about it. Let’s go back to the famous examples we looked at before.

Federal Express Example

Q: “Why should I use Federal Express?“

A: “Because your package absolutely, positively has to be there overnight.“

M&M’s Example

Q: “Why should I eat M&M’s?”

A: “Because M&M’s will only melt in your mouth, not your hand.”

Here’s an example as it applies to private money:

Q: “Why should I do business with you?”

A: “Because with me you can double your money in 6 years without losing a wink of sleep.”

I hope you now see the importance of developing a USP. It will give you the foundation to completely dominate the competition in raising private money. All the other real estate investor using the same old “earn 10% on your money…” bit will be blown away by you.

More importantly, you will be able to quickly and easily convey a benefit to your prospective investor that will create a burning desire inside of them to place funds with you and tell everyone they know to do the same thing.

-Happy Investing!

You know; the type of marketing where you send a physical mailing to somebody’s home so that they can touch, feel and read a marketing message in their hands?

It seems as though everywhere I look and everything I read is all about “online, digital and social” marketing. Nary is anything written anymore about direct mail. Sure, there are some people here and there who use it for their real estate investing businesses – and kudos to them – but the digital advertising tidal wave has engulfed just about everybody in business.

And, if it’s engulfing you, you may be flushing hundreds of thousands of dollars in private money right down the toilet.

Here’s what I mean:

Direct mail is a very tried and proven method for getting results with your marketing. You never have to guess if you ran a direct mail promotion correctly or not. Why? Because you either get orders or you don’t. It’s a pure blank white canvas of business opportunity – one of the last remaining vestiges of pure “winner take all” capitalism remaining.

With many other forms of media used in marketing, you cannot and will not know the true results of your efforts. For every one real estate investor (or agent) that knows precisely where their leads came from (and also: what the cost to get that lead was and how many leads they need to close a sale, lifetime value of customer) there are probably 1,000 that do not.

The one big thing most real estate investors miss the boat on when raising private money is that they think of getting private investors as a financing process.It’s not. Getting private money is a marketing process.

For those select few that understand this, the next step is implementation. And here’s how it usually goes: post on real estate message boards, blogs and online classifieds that they ‘need a private lending partner’. Ambitious investors may even get a website specifically for private money – but they will completely mess up this website. The site won’t talk about the benefits for investing in real estate passively. No. Their websites will basically be geared toward somebody who has been to the same bootcamps and other seminar training that they have. As you probably know, the response and ROI for these types of websites is pretty low.

So, this brings us back to one method (note: I did not say the only method) that has proven to work in marketing anything and everything for over 100 years: direct mail.

Here are the basics of using direct mail (the right way) to get private money…oh, also…please remember that there are legal and securities laws issues on marketing for private money that vary from state to state. It would be exhaustive and unproductive for me to go into all of this here. Just do the right thing and get a securities lawyer’s opinion and/or ongoing counsel when you get really serious about raising private money.

• Send a sales letter - a sales letter is just that: a letter you write to somebody where you enter into a conversation already going on in the prospects mind and show them how you have a cure for what ails them. Don’t use a lot of hype. Write for emotion and use enough logic to justify a prompt response (oh…and give a reason for prompt response, too!)
• Offer free information (not brochure or ‘credibility kit’) – either a free report/white paper or prospectus – Always remember that people like to buy – they do not like to be ‘sold.’ I know this sounds like a philosophical argument two French guys had back in the 1700′s, but it’s very true with anything you want to market or sell. Your free information is what’s called a ‘soft sell’. Learn to use and master this and you will get monster results.
• Use a #10 envelope with a live first class stamp or send FedEx – Many direct mail pieces fail not because the message was bad nor because the offer was bad nor because the list was bad – many of them fail because they intended reader did not get or open the envelope or package. Using a good old #10 or FedEx will cost more but the resulting response should easily overcome this extra cost
• Send follow up mailings (min. 3 mailings) – many direct mail promotions fail to yield a return on investment because the sender gives up if they don’t break even on the first mailing to the list. Show some persistence and send at least 3 mailings.
• Have a ‘backend’ sequence in place – if your call to action is a phone call, then make sure you have a business line, a receptionist (or virtual receptionist perhaps) and/or voice prompts
• Use a good mailing list – talk to a professional list broker and do not use ‘compiled’ lists whatever you do.

Whew!

Does that seem like a lot of work?

Well…it is, sort of. But as long as you remember the 80/20 rule (80% of the wealth is controlled by 20% of the people, 20% of your time drives 80% of your results) you should have no problem investing some time and a little bit of money where most of your competitors will not.

Earn Nightingale (founder of Nightingale-Conant) was one of the best inspirational speakers of all time. He was quoted as saying: “if you want to know how to become successful – and you have no other model to go by – just look at what most people are doing and…do the exact opposite.”

I couldn’t agree more. Especially when getting private investors to fund your deals.

-Happy Investing

You don’t see it coming – but it blindsides you nonetheless.

When you’re first raising private money to fund your real estate deals, it’s pretty tempting to grab at anything when someone says they’re interested in placing funds with you.

After all, you’ve spent some time, paid some dues and…finally…someone says “yes” I’m ready to invest.

But, then some interesting facts come out of the woodwork…

This “investor” needs to close really fast. They can only invest money for a short period of time (like 6 months). And, they want 20% on their money – flat rate (not annualized).

You’re stuck between a rock and a hard place: should you work with this person or not?

Before I answer that question, let’s look at what your ideal target investor should be like:

• Ready, willing and able to place funds
• Has seasoned funds to invest
• Does not have unreasonable expectations for rate of return
• Is an individual person or couple, not a professional investment company
• Is someone you don’t mind doing business with

I know this may seem like a high standard…but…being an entrepreneur and in business for yourself means YOU determine the terms and conditions which you want to do business. This means, thankfully, that you can choose to signal out and pursue the right people to develop relationships with. Relationships that are mutually beneficial.

If the 5 factors above do not line up with your prospective private lender, then something is off and you may end up regretting doing the deal with them.

Let’s break it down one-by-one:

The prospective private lender is not: “ready, willing and able”

Hopefully this one is easy. If the person you are talking to or corresponding with b/c they got in your marketing pipeline is not ready to invest, willing to invest with YOU nor has the funds to invest – it’s not a good recipe for success.

The prospective private lender doesn’t have seasoned funds to invest

In general, it’s not a good idea for you to have someone invest in a deal with borrowed money. Doing this introduces too many variables into the equation. You have to pay the investor who has to pay their lender. If something ever happens in the deal where payments to the lender must be delayed – such as a postponed sale closing, or if the interest rates on the lenders funds increase, you could be in for trouble.

The prospective private lender has unreasonable expectations for rate of return

If your lender wants to earn rates of return that are “out of this world” – such as those north of 14-15% or so, then I would be leery.Even though you may have a project that is profitable enough to pay these returns, there’s no need to pay them when you can get money for cheaper. It’s just more cash out of your pocket then you need to give. This is also a dead-giveaway that the other person has to crack a certain number, like if they are getting the funds from another source.

The prospective private lender is not an individual person or couple

Why should you rule out getting money from an institution? Maybe a private equity company? Simply put, these professional investors will dictate the terms and rules of the deal, and you’ll most often be put in the passenger seat – working for them. It’s just the facts. Put yourself in their shoes: what would you want? Most private money loans will come from those people who are happy to place funds in an effort to achieve good returns, diversify their portfolios and invest in someone they like and trust. This isn’t just a “homespun” thing either – Warren Buffet uses this strategy to this day, and he started it over 50 years ago.

The prospective private lender is not someone you would like to do business with

I can tell you from personal experience, no amount of money is worth a toxic business relationship. You don’t want to be constantly fighting or distracted from your chief focus because of a bad choice in private money lenders. You’ll have to use your gut instincts on this – but if the person gives you reason to pause or worry, or throws off the wrong signals, then you should think twice.

Now that we’ve laid down some ground rules, let’s go back to what we were discussing at the beginning: predatory private lenders.

These “private lenders” (in form, but not in substance) are looking for easy, targets to push high interest, short term money to. They are really hard money lenders in disguise. I often discuss at length the differences between private money and hard money. Please refer to my other writings on that subject.

If you stick to the ground rules that we just laid out, you won’t have to worry about predatory investors. You won’t have to worry about taking the wrong kind of money. You’ll get to do business on your own terms and with people that align with you.

It’s much better – and at least 10 time more profitable to do business this way.

-Happy Investing!