Your Fear of Raising Capital from Friends & Family

 

A big part of building a portfolio of multifamily properties is fundraising. I’m sure that many of you out there are afraid of asking friends and family to help fund your deal for fear that it may go sideways and lose all their money. So that begs the question: Should you let friends and family in on your deal?

I totally understand where that question would come from and fear is a powerful thing. We are afraid that if our brother or sister puts down $100,000 and the deal fails, they would not only not speak to us again, but they would talk to the rest of the family and tell them what happened. Losing that same money from a lifelong friend could ruin a relationship too.

That fear is something that haunts everyone, and more so when it comes to money. But it all depends on how you handle that fear. When a person invests in one of my deals, I feel an immense sense of gratitude that someone has trusted me with a sizable amount of their money. I also feel such a great deal of responsibility to protect their capital and produce a reasonable return – even more than if I used all my money. The thing is, I make sure that the deal I am working on is so solid that the chances of it losing money are very small to non-existent. My margin of error has to be great enough that it would take a total disaster to wipe out the property. And even then, there is still insurance to protect the asset. That said, the probability of losing my investor’s money is remote. It all begins with me getting comfortable with my underwriting, plan of attack and selling the property to deliver the returns promised and protecting the investor’s capital.

We all know that sometimes deals don’t work out. So what do you do in that case? Let’s go through a scenario where you’ve made some money flipping a few small houses and now want to go a little bigger. You get your hands on a run down 4-plex for $40,000, you plan on putting another $50,000 and selling it for $175,000. You borrow the entire $90,000 from your family and you get to work. But there are some mishaps; You underestimated the construction costs by $25,000 and you can only sell the property for $125,000. Instead of an $85,000 profit, you only made $10,000. This is a terrible disaster. But what do you do?

You have a couple of choices. You can either:

A. You can honor your commitment to your family by making them whole on what they gave you. You pay them back the principal plus interest. They will feel for you because you took the money from your savings, but that trust will go a long way. They will still talk to you and not ostracize you from the family. In fact, they would probably tell their friends about how you made good on your word.

B. You let the 9 family members that kicked up the $90,000 – plus your parents that kicked up the other $25,000, know that you will be returning their principle, but no interest and roughly $1,000 of the profit from the sale. Since you at least returned their principle, they will probably still talk to you, but you did not fulfill your promise. They will keep that in mind for the future – especially on the next deal you want to do. It will take a lot more convincing, but since you have a good track record, they may lend to you again.

We’ve looked at the best case and worst case scenario, but there is the consideration of not using friends and family in the first place.

When you are first starting out, friends and family is usually the first place you turn to get the financial support for your deal. This will extend beyond just the immediate people you know, but also their friends, neighbors, and people they work with. If you think about it, your friends and family network is huge. If you don’t leverage these people for your deals, it will be difficult if not impossible to raise the money needed to get the deal done – especially when you are starting out. You need to take the money if you are going to do a deal.

This means overcoming the fear and ask everyone you know – friends, family, people at work, everyone – to invest with you. It’s that fear that will hold you back if you don’t act and raising capital is important to getting the deal locked up.

The way you overcome the fear is to get so good at underwriting, get broker opinions before you buy, and plan for the worst. By preparing, you will eliminate your fear.

Have you taken money from friends and family? How did it go? Please let me know what you think. I’d love to hear from you.

And if you learned something from this video, give it a thumbs up and check out our podcast Bulletproof Cashflow on iTunes or Stitcher, and subscribe to the new YouTube channel. We are working on getting new content out all the time to help you build your success in the world of multifamily.

Be great.

4 Tips on Raising Capital from Investors & Finding Deals

Here are the four tips that came out of the meeting:

1. Build Your Network
I’m sure that some of you have heard the quote “Your Network is Your Net Worth”. This is where it all begins. Many of the wealthiest people in the world spend time forging relationships and networks with others. This is the first phase that leads to a business partnership.

In the world of real estate investing, this is the most important part of building success. I spend quite a bit of time cultivating relationships, getting to know people and positioning myself as a person that can help others achieve their goals in the multifamily space as a thought leader. I provide my network with a weekly podcast, a YouTube channel, daily videos, and live events to learn about multifamily real estate.

So, where do you start? Begin by speaking to your immediate “sphere of influence” and begin associating yourself with multifamily real estate. From there, you grow your sphere outside of your group. It will take a lot of time and consistency to get people you don’t know into your sphere, but the key is to meet with and talk to people that know your immediate sphere of influence. If your Aunt Mary associates you with multifamily real estate, it may come up as a topic of conversation when your Aunt talks to her dentist about her niece that is blowing it up at real estate. Many have raised millions doing just this!

2. Show Interest & Watch Your Language
When you are meeting with a potential investor, take the time to get to know them, to understand what is important to them and to discover their “why”. You can ask them, “What is driving your decision to invest in real estate?”. You will be surprised to find that it’s not always money. Sometimes it’s to build generational wealth. Or perhaps it’s to avoid getting nailed on taxes. Whatever the reason, take the time to understand them.

When speaking to investors, be aware of the words you use. Avoid using words that will get them saying a negative word or put them into a negative state of mind. We inadvertently use negative statements all the time: “What if the deal doesn’t work out?” or “What if I can’t raise the money?”. All these negative reinforcements hold us back individually. The same thing happens to others as well. Instead, we need to ask better questions that assume we will be successful, such as: “how do people that find great deals build success raising capital?” Follow their examples, study them and apply their techniques.

3. Look for Opportunities
To succeed in a hot market, you must be creative to find deals. This means not just looking at what the brokers are giving you. Rather, you need to get creative and look at what is around the on-market property. If other deals are selling in the immediate area, maybe someone who is not selling will unload their property to you.

4. Partner with Others
Back when I was buying single-family and small multifamily deals, I was investing on my own. My business was stagnant for many years. It wasn’t until I partnered with others that our skillsets were amplified; I had someone I can lean on where we complimented aspects of our strengths and weaknesses. Whether it be analysis or just bringing a balance sheet to the table.

Finding a partner takes time. You really need to know yourself before and work together to know if you want to continue building a business. If you are a high action individual with aspirations to build massive wealth, you may not want to partner with someone who is happy doing one small deal a year – or vice versa. You also need to know what you are good at and what you are not so good at. You want to find partners that compliment these elements and have the same ethics and goals as you do. You build a team around those answers and your business will do well.

So, to wrap it up, to raise money and find deals you need to:

1) Build your network and establish yourself as “the real estate expert” in your immediate circle of influence. This is done by talking to people about what you want to do with real estate and staying consistent with your message.

2) Ask questions and show genuine interest in the people you are speaking with. Pay attention to what you say and how you say it.

3) Make opportunities where there are none. Knock on the door, get to know potential sellers, and target markets with activity.

4) Partner with people that has strengths that complement yours, and you can join forces to focus on a goal.

What do you guys think? Do you have other tips? Let me know. Comment below.

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