4 Things You Need to Know Before You Raise Capital for Real Estate
Recently, I spoke with a gentleman who was interested in acquiring a larger apartment building.
He had previously acquired and operated smaller multifamily properties and was looking to take on larger properties.
Based on our conversation, I noticed that he had a strong background in managing multifamily properties and a knack for identifying promising opportunities.
However, he was struggling to find the money to take down larger projects.
For this larger apartment building, he planned on raising somewhere between 1-2 million dollars of equity to close on the property.
He had never actually raised outside capital for any of his previous deals.
I understand his situation because I had similar problems when I was new to the industry.
I relied heavily on friends and family to get my first few deals off of the ground.
However, as others started to see the kinds of deals that I was doing, these same people who were initially skeptical were now asking me to participate in my real estate offerings.
After fifteen years of doing deals, you eventually build a track record and a reputation – both of which are integral for long term success as a syndicator.
Knowing how long it took to get to where I am today, I always advise those looking to syndicate capital for their deals to have realistic expectations for their first raise.
I advised this gentleman that although it is possible to raise $2 million on your first deal, it is a challenging feat – especially as a first-time capital raiser.
Based on our conversation, I decided to write this article to educate first-time syndicators on some of the things I learned the hard way as a real estate syndicator.
Below is a video where I share the 3 steps to raising capital (how I do it). Not the only way, but has worked well for me.
#1 – There no shortcuts in to Raising Money From Investors
You can buy a database of accredited investors and send direct mail to high net worth individuals.
You can cold-call family offices.
You can prospect LinkedIn.
But this is a relationship business, and relationships do take time.
Quite frankly, if I received a letter in the mail or a random cold call from a stranger about an opportunity to invest in real estate, then I would likely hang up the phone or toss the letter in the garbage.
You want to initially focus on people in your immediate circle.
These are people that know you, like you, and most importantly, trust you.
If you do not know any accredited investors, then ask the people you know to make introductions and begin the conversation.
#2 – Start having those conversations well before your first capital raise.
You want your potential investors to know who you are and what you do well before you even ask for any money.
You want to be clear on what you do, how you plan to grow your potential investors’ wealth, and why they should trust you to get the job done.
During those conversations, avoid coming across as needy and avoid hard-selling the investor.
Accredited investors do not buy into aggressive sales tactics.
When deciding whether to invest, accredited investors and high net worth individuals are looking for a few simple things.
- They want to know why they should invest in this deal.
- They want to know what makes this property unique.
- They want to know what the competition is doing.
- They want to know what you are doing that others may not be able to do.
- They want to know what the returns are for this property.
- They want to know what the risks are.
Once you have got an investor’s interest and attention, you want to engage them and have them ask questions about the property. Do not be afraid of letting them know about any proprietary networks, databases, or processes that you possess.
If you have found an off-market property or have sourced off-market deals in the past, definitely let your investor know about how you find these deals and what challenges you overcame to get those properties under contract.
Once you have established rapport with your potential investors, there are two other things that you need to know before going full steam ahead with your syndication.
#3 – You need to make sure you have the right property.
How do you know you have the right property?
It is simple.
You have a property that has problems that can be fixed.
Although you can’t fix location, nor can you fix overpaying for a property, you can fix a property that has some or all of the following problems:
- Rough tenant base
- Poor collections
- High vacancy
- Poor curb appeal
- Deferred maintenance
- Poor management
- High turnover
- High operating expenses
- Below market rents
The more problems a property has, the longer it will take to turn-around the asset, and the more risk you will incur as an operator.
Some investors may not be interested in holding onto a property for longer than 3-5 years, while others may not be comfortable taking on so much risk – especially if you are a first-time syndicator.
Not every investor you meet will be a good fit for your deals.
#4 – This is why you have to be consistently growing your network, talking to people, and finding opportunities.
In addition to speaking with investors, get in touch with brokers, lenders, and other syndicators that are acquiring properties.
You may meet an investor who might be the perfect fit for your types of deals.
By speaking with an intermediary, you may come across off-market properties that nobody else has seen.
If you do come across something that looks promising, get control of the property by putting it under contract.
In my experience, some highly sophisticated investors will only speak with you if you have an actual property under contract.
When you take control of a property by putting it under contract, you demonstrate to your investors that you are not only serious but that you are not wasting their time with hypothetical pie in the sky deals.
If you put a property under contract, but cannot raise 2-3 million dollars for the deal, then bring in others to help you out.
By having conversations with syndicators and investors, you become part of their network.
When you start putting yourself out there and building a reputation, then you will see your reach grow organically over time.
It may even take years before things take off.
When I started syndicating deals, I was not getting 35% of the upside on a deal and paying a 6% preferred rate to attract investors.
I was giving up way more than that and leaving a lot of money on the table.
But once I built that reputation and started paying back my investors, everything started to come together from there.
Takeaways for Real Estate Syndicators:
- There are no shortcuts in syndications.
- Relationships can take years to build.
- When starting, focus on the people you know.
- If you do not know any accredited investors, then ask for introductions.
Start having conversations well-before your first capital raise.
- Avoid aggressive sales tactics or hard selling your deal.
- Be clear on what you do and why they should trust you.
- Let the investor ask questions.
Make sure you have the right property.
- Not all problems can be fixed – such as location or price.
- But several problems can be fixed.
- Focus on properties that have problems that you can fix.
Constantly grow your network and find opportunities.
- Not every investor will be the right fit for your deals.
- Not every opportunity is a deal.
- To maximize your success in the world of syndication, you need to be constantly reaching out to people, including brokers, lenders, investors, and other syndicators.
- When the right opportunity comes your way, do not be afraid of taking control and putting a property under contract.
From flipping fixer-uppers to raising anywhere from $2,000,000- $9,500,000+ per deal and earning $100k-$200k upfront, I learned the commercial real estate syndication game through the school of hard knocks.
Over the years, I have been invited to many lunches and coffees to help other real estate investors scale their businesses, structure deals, raise money, and evaluate opportunities that they are finding. My 12+ years of experience in raising capital and commercial real estate investing has saved some of my clients from fatal deals.
It is such a loaded topic, that even a few hours of coaching was not enough to truly help them.
So, I started sending them long emails and documents with principles on how I invest in commercial real estate.
Eventually, those emails and documents were organized into a series of articles and videos, which formed the basis of the Commercial Real Estate Training Program – an 8 Week-long program designed for active real estate investors interested in investing in commercial properties.
By participating in this program, I can help you design your commercial real estate investing blueprint by showing you the exact systems and processes I use for my investments.
On the other hand, if you are a highly paid professional looking to learn more about commercial real estate, then check out my article “Why Many Highly Paid Professionals Have No Idea How to Retire” and go ahead and download my free e-book “Club Syndication” – which you can find here.
Shane has invested in commercial real estate since 2008 and personally completed multiple 8 figure deals. He’s currently a developer in Calgary AB, with multiple retail, industrial and multifamily/townhouse projects underway.
One of his favorite deals, was acquiring an 1,152-acre resort property just north of Toronto for $8.5M and turning it around and selling three and half years later for $17,000,000. It was not a smooth deal and things didn’t always go as planned. It worked out in the end, and it was this experience that gave him a real-world MBA in investing.
Commercial Real Estate Investing Scorecard
My 8 Non-Negotiables to Investing and the checklist for how I analyze every property