I believe the ultimate success we have with real estate investing has nothing to do with the #s. It’s about our psychology. Might sound fluffy but I imagine most successful investors will tell you that’s true.
How much money do you want to make on your next deal?
And, using reasonable assumptions, how much will you need to bring to the closing table and at what purchase price?
Know the answer to the first question but not the second? Have no fear, a new calculator is here!
Someone asked me yesterday the following question:
“If I want to make $4,000 a month on my next property, how much would I need to raise and what would be the purchase price?”
Well, my first thought is a billion dollar property should cut it. 🙂 But I didn’t think that would be an acceptable answer so REALLY the question is what’s the MINIMUM down payment and purchase price to reach $4,000 a month income.
After doing the math on the back of a junk mail envelope I started talking to my roommate, an Excel and financial wiz. We came up with this handy, dandy calculator.
Using reasonable assumptions like finding a 12% cash-on-cash return property, it tells you exactly what you’d need to buy and how much you need to have in order to create that desired cash flow.
Oh, as far as the answer to the 4k a month question? It’s an $8MM property with cash investment of about $2.4MM using the assumption the deal is syndicated and there is an investor preferred return of 8% and profits are split 50/50 after that.
You can use this calculator if you are syndicating a deal OR if you are just using your own money. If using your own money then make the preferred return 0% and make the Manager cut 100%.
What’s the primary reason people invest in your deals?
I closed on my first apartment syndication deal in February 2014 where I raised over $1,000,000 from private money investors. Before that process started, when I asked myself that question, I thought the primary reason people would invest in my deal would be because of the returns.
But I was dead wrong. Yes, returns are necessary and part of the equation, but returns can be provided by any number of other people and through any number of investment avenues.
What I discovered is it’s because they trust you.
They trust you as a person. They trust you as a businesswoman or businessman. And, as a result, they trust you with their money. They know you or they know people who know you and can vouch for you.
So, to raise $1,000,000 or more for your first apartment deal, the question you need to reflect on is how do I gain trust from potential investors? To help you get started, here are three ways:
1. Time with them.
It takes time to establish a relationship with investors. For your first syndicated deal, you most likely won’t have investors who haven’t known you for a at least a couple years. You just don’t have the track record yet. Once you establish a track record, then it will be easier to get strangers to invest with you because of your proven track record (read here for more on the skills you need prior to raising money).
So, the more expertise you have (see below) the shorter amount of time you have to know them. For my first $1,000,000 raise, I knew all of the investors (none are family members, btw) for a period of 2 – 10 years. But, the more experienced I got and more deals I did, the lower that window of time became. In fact, after growing my portfolio to over $100,000,000 (and the subsequent lessons learned), I am to the point now where I attract investors who I’ve never even met.
You MUST demonstrate the expertise in a way your potential investor understands. Who cares what you know. It’s about what’s relevant to your investors and how you communicate it to them.
A doctor needs the info communicated differently than an engineer than a small biz owner than a person who has invested in real estate before. The key to your success is recognizing how to communicate the information to each audience based on their background and needs.
By the way, it’s possible to display expertise even if you haven’t done that specific thing you’re raising money for. That’s what I did for my first money raise.
I had never purchased an apartment community prior to raising money to buy my first deal – a 168-unit complex. But, I did have relevant experience in real estate. I had a portfolio of single family homes and taught classes on how to invest in real estate. That experience, combined with me aligning with more seasoned team members (mentors + property mgmt. company), allowed me to qualify in the expertise category.
Another way to begin building credibility as an expert is to create a thought leadership platform. Kathy Fettke, leveraged her thought leadership platform, a podcast, to raise $5 million in one week! Other thought leadership platforms besides a podcast can be a blog, YouTube channel, newsletter, an ebook, or meetup, but there are numerous other ways to become a thought leader. Be creative and find something that complements your strengths, unique abilities, and of course, that you like to do!
The thought that people only invest with their analytical mind is bogus. We invest with emotion. We go in with preconceived notions about something then we tend to look for things that validate that notion.
Try this exercise I learned from Tony Robbins. Look around your room and for the next 30 seconds find everything that’s red. Look red. Find red. Look red. Find red.
Now, write down all the things you saw in the room that are blue.
While looking for red you probably found stuff that was reddish brown or orangeish red but counted it red. And we don’t find stuff we’re not looking for.
The point is we find what we seek. And investors do the same thing. If they have a preconceived notion about you and the investment they’ll look for ways to validate that. So, the key is to establish a solid personal connection with them.
This can be done by knowing what they care about and seeing if you can align with that in a genuine way. Don’t know what they care about? Ask them this magic question:
“What’s been the highlight of your week (or weekend)?”
That will uncover some things that are top-of-mind for them. They might say “making a business transaction” and that will tell you that it’s important to focus on the #s and profitability more so than other conversations. Or, they might say, “finally being able to get away with my family” and that will tell you that time is precious and perhaps you should play up the “passive investment angle” with them.