Raising real estate investment capital is oftentimes the most challenging aspect of running a real estate investment business. Even investors with strong track records and proven performance are generally always looking for new sources of capital. This article describes the various capital raising strategies in 2018. This article is focused on providing strategies for the small real estate investor, not institutions, REITs, or large PE companies.
Raising capital for real estate investments is easier in 2018 than it has ever been. The internet, crowdfunding platforms, and more favorable securities laws, have opened the door to new capital raising opportunities that even a few years ago didn’t exist.
As you can imagine, the internet has created the opportunity for real estate investors to connect with people across the world who they otherwise would never have met. In the old days, real estate investors relied on their personal contacts to fund their real estate investments. This would include family, friends, or people with a prior business relationship. Real estate investors would go down to the local country club and mingle with the rich folks. They would pitch their doctor during their annual physical, or take their rich uncle out to dinner. Their reach was very limited compared to what is available now. Today, real estate sponsors can actively market their deals all over the internet – something that was securities laws restricted until just a few years ago. Now, real estate entrepreneurs can market their deals on crowdfunding platforms that will expose the offering to tens of thousands of accredited investors in a matter of hours. Now, real estate investors can be guests on podcasts – where they can market their business and investment strategy to hundreds of thousands of potential capital partners. The ability for investors to get the exposure they need to secure capital for their real estate investments is easier than ever before.
Before you begin peddling you deal, be aware that not everyone can invest. The Securities and Exchange Commission, back in the 1930’s, created a number of laws governing securities and investments in order to inform and protect people from the inherent risks of investments. A big reason for the Great Depression was that our capital markets were in shambles – as a result of all the shady characters operating without many guidelines. These laws put restrictions on both who can invest in real estate offerings and how those offerings can be marketed to potential investors. The laws were loosed under the Obama administration in the JOBS Act of 2012.
Disclosure: this article will only summarize the situations that are likely to impact the real estate entrepreneur and does not provide a full description of all laws pertaining to the subject. Also, note that I am not an attorney. Prior to soliciting investments for any real estate project, be sure to seek legal counsel from a qualified attorney who is well-versed in securities law. Also, take a look at this article on syndication basics: http://www.creentrepreneur.com/real-estate-syndication-basics/ .
Prior to the JOBS Act, laws significantly limited who real estate sponsors could market their offerings to. These rules were implemented shortly after the Great Depression, in an effort to protect people from losing money in bad investments. Under the old rules, real estate syndicators/sponsors and private companies, could only market offerings to people with whom they have had a “prior business relationship.” Public companies, however, were allowed to advertise because they are so heavily regulated. Private companies are not nearly as regulated, and therefore, they could only market their offerings people they already knew. This made it difficult for real estate entrepreneurs, especially those with small networks of accredited investors, to raise capital.
The JOBS Act removed this restriction on “general solicitation and advertising” (subject to certain conditions). As a result, private companies (real estate sponsors) are now able to market their offerings with fewer restrictions than before. Although there are still restrictions on marketing offerings to unaccredited investors [under Rule 506 (b)], under Rule 506 (c ), the issuer can utilize “general solicitation and advertising” and is no longer limited to those with whom the sponsor has a prior business relationship. In other words, Rule 506 (C ) eliminates the general solicitation ban and allows sponsors to market their offerings to anyone and everyone. This rule however has one important restriction, and that is, that it only allows accredited investors to access the project. Therefore, if you elect Rule 506 (C ) you can market to anyone, anywhere, anytime; however, you can only allow “accredited investors” to invest in your offering. On top of that, it is up to the sponsor/issuer to verify that the investors truly are accredited. I won’t delve into the details here, but a few platforms that will assist you are VerifyInvestor and earlyiq. Another easy way to verify investors is to have either a licensed attorney, CPA, registered broker-dealer, or registered investment adviser verify the accredited status (within the past 90 days) of the investor.
The SEC defines an accredited investor as someone with either an annual income of $200,000 for a single person or a combined income of $300,000 if married (for the past 2 years), or a net worth of over $1 million excluding the value of one’s primary residence. It’s more complicated than this so be sure to research the SEC guidelines further.
As part of your company’s business operations plan, you should develop a strategic plan for raising capital. This should include a set of systems and processes that will enable you to raise capital at any and every opportunity. You want to have investors lined up and interested in your offerings well before you will actually need the capital. In other words, develop a set of processes that enable you to have a list of motivated prospective investors, who are aware of you, your company, the types of investments you make, and understand the risks and rewards associated with investing. You want to have a lead generation plan, a lead nurturing plan, educational materials, and set specific goals for you investor networking plan.
Many real estate entrepreneurs fly by the seat of their pants. They are dreamers and decision makers, and oftentimes, not the most process oriented. They see an opportunity and run with it. Many times they don’t lay a foundation of processes and procedures for anything in their business, even their capital raising activities. Many think that if they find a good deal, the money will come. That is true if you have a solid set of investors who are well informed, confident in your abilities as the manager, and ready to pull the trigger. Don’t wait until you are under contract to figure out how to fund you investment. Do it now!
Before you begin networking, determine specifically who your target investor is. Determine if you plan to partner with high-net-worth individuals, ultra-high-net-worth individuals, foreign investors, or family offices. Are your investors younger or older, tech savvy or prefer to communicate by phone or in person. Are they doctors, attorneys, entrepreneurs, technologists, or the lucky few who inherited a sizeable wad of cash. You will have to make sure that your target investors’ values are in alignment with your philosophy, that you can build rapport with this group, and that your investment strategy is in alignment with their needs.
As a result of the JOBS act, which was signed into law in 2012, established crowdfunding provisions now allow private companies to offer and sell securities. Real estate crowdfunding has opened up a huge opportunity for both sponsors and investors alike. Now, sponsors can post their offering on a crowdfunding platform where it will be exposed to thousands of investors. It is great for investors because they can now gain access to a variety of offerings from many different sponsors.
Although real estate crowdfunding represents a sliver of the investment pie it is projected to be valued at more than $300 billion by 2025; not bad for an segment that has only been around for a handful of years. A few of the stronger players in this category include: Real Crowd, Fundrise, Realty Mogul, RealtyShares, and CrowdStreet.
Build a database of accredited investors. You should already have a database full of real estate contacts including: brokers, property owners, developers, tenants, attorneys, property managers, accountants etc. I won’t delve deep into this topic here, but every real estate entrepreneur should constantly be communicating with and growing her network of real estate contacts. As such, start building a separate list within your CRM of accredited investors to reach out to when you have an offering for which you will be seeking funding. A few good options include: Highrise, contactually, insightly, clientlook, or propertybase. Juniper Square, the preferred software platform for investor reporting, also includes a built in CRM.
In order for your investors to pull the trigger and invest their capital with you, they need to feel confident that they know enough to make the decision to invest. You need to create and provide them with content that will give them the information and education they need to make real estate investment decisions. Don’t rely on your charm charisma to woo people into giving you money. Make sure they know the risks and rewards, tax incentives, expected returns, and payout structure of real estate investments. This will not only give them the knowledge they need to make informed and decisive investments, but will also add to your credibility as the sponsor.
They say that in sales it takes 7 “no’s” before you get to a “yes.” Marketers also recognize the power of constant engagement and repetition. That’s why you see ads everywhere, from billboards, to Facebook, to the jerseys on your favorite sports team. This same strategy should be applied to maintaining contact with your investor network. You don’t have to pay for Facebook ads or call them every day, but be sure to connect with them on a regular basis. You need to send the message that you are active, that you are making deals, and ultimately, that you are delivering for your investor partners. Make sure that you call them from time to time, get them on an email list, send them educational material, host occasional meetups, and make them aware of the successful transactions that they passed on. Make sure however, that your message is educational in nature. Accredited investors are smart, savvy, and are turned off by pushy sales tactics. Instead, give them information, data, and insights that will help them make an educated investment decisions.
Use technology to boost your reach. For example, I live in San Diego and have networks in several markets on the East Coast, Chicago, Arizona, Utah, Orange County, LA, San Francisco and Sacramento. But, by contributing on blogs and forums, attending meetups, partnering with other real estate investors, connecting with others on LinkedIn etc. I can expand my reach tremendously. I’m also high on voice – a rather new medium with a growing user base – and I believe that either hosting a Podcast, or appearing as a guest on Podcasts, is a great way to establish your reputation and grow your reach. Once you’ve established your business and have a few deals under your belt, reach out to various podcast hosts. Don’t beg to be on their show. Instead tell them what you are doing and how your insights will be of value to their customer base.
You need to build a brand around yourself and your company. You need to establish your presence, build your reputation and your brand. Building a simple website is a fast and easy way to establish your brand and convey your professionalism. If you can afford to spend an hour or two per day you will have a professional looking website up in about a week. No joke. It’s really that easy. From someone who is a self-taught website builder (me), follow this advice. Before you start building, do some research on the best platform for your needs. I would look at Wix or Squarespace; WordPress has a steep learning curve and will take you months to fully understand – so I would avoid this platform. Spend a few hours watching tutorials on YouTube before diving in. Then, take the content you have already developed for your pitch decks and other marketing materials (create your business plan and content and pitch decks before you invest in a website) and copy it into the website builder. It’s really that simple.
There are people out there who have already developed large networks of accredited investors. Oftentimes, these are people who have sponsored and managed real estate investments. I call these people tribal leaders. Their investor following will not only invest in the deals sponsored by this tribal leader, but if the tribal leader invests in someone else’s offering, the tribe will follow. Wouldn’t it be easier to motivate just one person to invest in your offering? I think yes. So go out and find a tribal leader, who will invest in your offering and recommend to his or her entire network that they consider the offering as well. Go out and leverage someone other people’s platform (OPP)!
I almost removed this section from the article due it’s simplicity; however, asking for referrals is one of the most important strategies successful CRE entrepreneurs implement. You should be asking everyone with whom you do business if they have referrals for you. You should ask brokers for referrals, lenders, and obviously, ask each one of your investors for a name or two that is also seeking better returns than they are generating from the stock market.
Getting a real estate investment business up and running is tough for many reasons, one of which is securing funding for your first few investments. You will struggle to raise funding for real estate acquisitions until you have established a track record of success. However, you will not be able to establish a track record of success until you have the money to fund your investments. In other words, unless you have a ton of cash laying around, you won’t be able to raise the money you need to get started. So what is one to do?
My advice would be to join a small, entrepreneurial real estate company that will enable you to develop the skills and experience you will need to convince prospective investors that you will be able to deliver on your promises. Another way to overcome this challenge is to find a deal and then bring that deal to an experienced sponsor and let them take the lead on it. However, make sure that they understand that you are bringing them the deal on the condition that you are actively involved, so that you can learn the business. Don’t just negotiate a paycheck. After that you will need leverage your personal network: friends, family, relatives, and friends of friends. This can be somewhat awkward and uncomfortable, but oftentimes, has proven to be the primary method by which real estate entrepreneurs get their start.
Everyone in the real estate investing world looks forward to the day when they no longer have to rely on friends and family to fund their real estate pursuits. Once you’ve established a track record of performance you will actually have a shot of getting funding from accredited investors. Luckily, raising money in 2018 is easier than ever before!