Originally published in Forbes.com on 09/30/19
Every business needs capital for growth. Whether it’s the seed money necessary to get a new business up and running, or the funds required by an existing business for a capital equipment acquisition, capital is key. This concept is equally important in the real estate business, as each transaction relies heavily on capital. Thus, the need for capital to transact real estate deals creates a significant place for capital raisers in the real estate transaction.
In our business we’ve raised over $120,000,000 in investor capital in over thirty syndication transactions. From these experiences, we’ve learned a lot about capital raising. I also mentor aspiring syndicates on this important aspect of their business. I’ll highlight three tips here to get you off to a good start.
Let’s face it, not many of us like a sales pitch. Being true to yourself can greatly increase the likelihood of others wanting to work with you. An accurate, realistic message that shares your story, as well as your business model is a critical factor in capital raising success. Potential investors would rather know you and your business more personally than be up sold.
Focus on keeping your message logical and simple while educating your potential investors. A clear, concise message that educates investors sends the message that you are knowledgeable, which will likely increase a potential investor’s confidence in you and your services.
Being authentic helps investors learn about real estate investing, but it also helps you too. As I’ve shared my expertise with investors and potential investors, I’ve paid keen attention to the questions asked of me. Those questions form a great sounding board for increasing my personal knowledge, and ultimately the knowledge of our investors as we strive to promote education. Always look for learning opportunities.
Raise 25% More Than You Need
In raising capital, if your goal is to raise $500,000, then I recommend you get 25% more on backup in case you have drop out. Your mental target should be $650,000 or $700,000. Expect to have drops and plan for it. The better you get the fewer drop out because more of your investors will be return investors but still, life happens and someone who commits today may not be in position to sign the documents and fund 3 to 4 weeks later.
It is important to keep your investors in high regard. Always remember that life happens during the capital-raising process. Lots of things can happen in people’s lives during this time period. An investor’s work or travel schedule, health or family issues, job concerns, liquidity uncertainties, and other life moments may change, which could divert a potential investor’s attention—especially time—away from any given deal. A person who reserves a spot during the first week may realize during week 4 that he may not be able to participate.
My best advice to capital raisers who find themselves in this situation is to not be surprised, and to be empathetic toward the potential investor’s needs. One of the primary focal points of raising capital is to establish—and build upon—long-term relationships. That way, when the potential investor is ready, they will likely return to do business with you. Having backup will just keep you calm and in stride with the process and reduce stress and anxiety.
Take 50% First Rule
Another recommendation that can improve capital-raising goals and improve credibility is to employ the 50% rule when you are working with first-time investors who want to make big commitments. Let’s assume that a person wants to invest $200,000 in a deal. You might suggest that the person invest $100,000 and put the rest on backup. This method provides the investor with more time to better understand your business model. It can also enhance your credibility with investors, as you are demonstrating a more reserved standpoint of your investor’s cash reserves, while creating a backup plan for future funding. In addition, it can increase interest in and demand for future funding opportunities.
In summary, mastering these tips can help you increase your investor base, as well as retain existing investors through repeat business on future deals. In today’s competitive marketplace, these ideas can help you achieve a win-win-win: Not only will your organization benefit, your relationships with sponsors and investors will also be strengthened as they benefit from your capital raising activities.