JF1562: How To Raise Capital From Private Investors Part 1 of 8 | Syndication School with Theo Hicks
Were back with more syndication school episodes. Today we’re going to start talking about raising the money from private investors. You’ll need to get verbal commitments from investors so that you’ll know how much you can raise and what kind of properties you can buy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the apartment syndication school, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series – a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.
Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document, or a spreadsheet, or some sort of resource for you to download for free. All of these documents, and past and future Syndication School series, can be found at SyndicationSchool.com.
This episode is part one of a series entitled “How to raise capital from passive investors.” This is series number 11, and I highly recommend that you go listen to series one through ten. I know it’s gonna take a while to listen to those, but everything that we have discussed so far has been leading up to this moment, which is the moment where you are now finally ready to start generating interest for your deals and attempting to raise money.
After that, we will start talking about how to actually find deals, and you’re ready to actually start your syndication journey. But before you start finding deals, you need to actually have verbal interest. The reason why, if you remember back to when we set our goals, you need to know how much money you’re capable of raising, because that will determine the type of property you can buy.
If I’m only capable of raising $50,000, then I’m not going to be looking at 100-unit deals. But if I’m capable of raising a couple million dollars, then that’s an entire different story. Plus, understanding how much money we can raise will help us set our 12-month goal. But more importantly, we need to know how much money we can raise to actually set investment criteria for the types of deals to look at.
This will be part one, where we will talk about the introduction to raising money. First, we’re gonna go over a task to gauge your mindset as it relates to raising money. Then you will learn how to overcome any fears or limiting beliefs you have about raising money, and then we’ll talk about why someone will even invest with you in the first place.
All of this episode is basically focused on mindset, because for some, raising money and using other people’s money to buy real estate could be something that you are a little hesitant at doing.
In The Best Ever Apartment Syndication Book we offer a five-question sanity test to essentially gauge where you’re at and how you think about using other people’s money… So answer these five question; they’re just yes/no questions:
Do you have a fear of using other people’s money? Yes or no.
Do you have reservations about partnering with investors?
Do you think your relationships with your friends and family will be forever changed if you partner with them on a deal?
After successfully completing ten or more syndications, do you think you’ll be ten times more concerned with gaining and maintaining trust with your passive investors?
And then finally, do you think after you’ve done ten or more successful syndicated deals your ongoing awareness of the importance of being trusted with investors’ capital will be magnified by ten times?
Unless you’ve actually used other people’s money for investing before, then you will likely answer yes to all these questions. In the book we made a joke about if you don’t answer yes to these questions, you’re probably a sociopath, which — obviously, this isn’t a sociopath test, but the whole entire point is that the sanity test lets you know that it’s okay to be, for example, slightly fearful of using other people’s money… Because if you’ve never done it before, of course you’re going to have some sort of anxiety around it, just like anything new that you are trying; you’re not gonna go in there super-confident, because at the end of the day, you don’t really know what you’re doing.
The second question about “Do you have reservations about partnering with investors?”, of course you should. It’s a huge responsibility. They’re giving you their hard-earned capital, and you are using that to hopefully make them money, but obviously at the end of the day things could go wrong and you might not make them money. So it’s a pretty big burden on your shoulders to make sure that you are doing things properly.
The third question – “Do you think your relationship with your friends and family will be forever changed if you partner with them on the deal?” Of course it will. It’s probably different when a stranger invests in your deal than a family member, because when a stranger is investing in your deal, you’ve only known them for as long as they actually reached out to you, whereas for a family member you’ve known them for your entire life… So there’s a lot of extra baggage that comes with that. And typically, your relationship with your family is a lot more personal, whereas if they actually invest in your deal, that relationship is gonna have the added business dimension. And you know your family members really well. Sometimes they might be really weird about money, so definitely expect if you’ve got your family investing in deals for things to change with that relationship.
Question number four, “After successfully completing ten or more syndications, do you think you’ll be ten times more concerned with gaining and maintaining trust with your passive investors?” Well, after doing ten deals with the same passive investor, you’re definitely going to have a much closer and stronger personal connection with them, and you’ll look at them as more of a friend, and as a result, you’ll want to take care of them more. So yes, you’ll be way more concerned about making sure you’re maintaining that trust factor with them, and that you are able to return their capital to them, because they’re your friend now.
And then lastly, do you think that after doing ten or more successfully syndicated deals your ongoing awareness of the importance of being trusted with investors’ capital will be magnified by ten times? Of course, the answer is yes, because they are actually helping you to achieve your financial goals by investing in the deal, so you want them to trust you, so they’ll keep coming back… But at the same time, not only do you want them to trust you so they keep coming back, but one of the main sources of new investors are going to be referrals. So if they trust you, then they are more likely to refer you to one of their friends, and that can start a domino effect, where you’ve go referrals from them, and then that person refers you to someone else, and you can eventually grow your investor database based solely on these referrals.
Overall, the purpose of that five-question sanity test was to let you know that it’s okay to be afraid, and it’s okay to have reservations, and we are going to talk about how to overcome that fear and reservations in this episode.
So how do you overcome this fear or this barrier of using other people’s money to invest in real estate? This is not the most common question, but it’s a pretty common question… Maybe not asked exactly in that form, “I’m afraid to use other people’s money”, but you can see it subtly through these questions that the reasons why they’re asking that question is because they’re probably a little hesitant about using other people’s money to raise capital. I know I’m for sure a perfect example of that.
The way you overcome this fear – it really varies from situation to situation, and person to person… So I’ll just give you a few examples, because examples are really the best way to explain things.
For Joe, it was out of necessity. Now, keep in mind he has always been confident with raising money; it was never something he was necessarily afraid of, but this is more of a story of how he got to the point where he needed to raise money, and if he was afraid, his need would have allowed him to overcome that fear… Because he had a goal and he needed to accomplish that goal, and raising money was the only way.
So Joe initially started off by purchasing four single-family homes in about three years. His original goal was to make $10,000/month, and I believe with these four properties he had about $1,000/month coming in, cashflow. But the problem was that he couldn’t see a quick way to scale this single-family business to $10,000/month, because four properties generated a $1,000, so he would need 40 properties to generate $10,000/month… And he didn’t know how he would get there. He didn’t know how he would save up the down payments, mostly, for all those properties, let alone actually qualify for financing, since you’re only allowed to get up to ten of these residential loans.
At the same time, he was spending a lot more of his time managing these four properties than he would actually want to. And then, of course, only making $1,000/month, if you have one move-out or one large maintenance issue, then all that $1,000 goes away, and all that time and three years of energy was not necessarily wasted, but he was that much further away from his $10,000 goal.
So he started to investigate ways to overcome this problem. He went to the Rich Dad, Poor Dad seminar, where he heard that the only way to get rich was to not do single-family residence, but to do apartments or mobile home parks. Joe wasn’t familiar with mobile home parks, although he had lived in one when he was younger… But he did live in an apartment at the time, and decided to choose apartments over mobile home parks for his way to reach that $10,000/month goal.
But of course, the same issue arises, which is how do you afford the down payments, and then Joe discovered the apartment syndication investment model, and obviously the rest is history.
Again, he wasn’t necessarily afraid of using other people’s money, but if he was, then he would have been able to overcome that fear out of necessity. So if you’re in the same situation and you have a goal of making a certain amount of money per month, or something else that you want to accomplish, and you aren’t able to do it on your own, by using your own capital to finance deals, then you need to ask yourself “What’s worse? Me being afraid of talking to other people and raising money, or would I much rather be afraid, but be able to reach my goals? Or would I rather not reach my goal, but not have to face an investor and ask them for money?” It kind of just depends on who you are, but obviously, for Joe, actually talking to investors and reaching his goals was better for him than just not doing it, and trying to figure out how to actually scale these properties.
Now, even though Joe, again, wasn’t necessarily afraid starting out, a better example would be me, because I never even imagine myself raising money for deals, because I was afraid of using other people’s money… And the way that I overcame this fear was a combination of things. Number one, it was just sheer luck. If I had never met Joe, which was really sheer luck… I happened to become interested in real estate around the same time Joe moved to Cincinnati, and Joe was also active on Bigger Pockets, and also was interested in starting a meetup, so the stars aligned… So I met Joe, and obviously Joe raises money, and that was kind of my introduction into the concept of apartment syndications, whereas before I had no idea that that even existed.
Secondly, it would be experience and education. Through working with Joe, I obviously have gained a ton of experience and knowledge about the syndication process, and obviously education and experience are the two main requirements to becoming an apartment syndicator. You can learn more about that in the Syndication School episodes 1499 and 1500.
Obviously, with that experience and education I had more confidence in my ability to successfully implement a syndication business plan, which then in turn gave me a little bit more confidence in raising money… But I still wasn’t there yet. I was still afraid. I still was like “Well, I have all this information in my head about syndications”, but earlier I said that people ask questions, and they don’t necessarily say “I’m afraid of raising money. How do I get over it?”, but they’ll ask a question that is assuming they’re afraid. One of those, I think, is “I don’t know how to raise money” or “I don’t know anyone to raise money from”, whereas in reality what you’re saying is that “I’m too afraid to approach anyone in my network to ask them for money.” At least that’s what I was doing. I would say I didn’t know who I’d raise money from, I didn’t have anyone in my network who was high net worth, whereas in reality I’m sure I did, but I just was too afraid to actually do anything.
But the big game-changer for me was actually the Best Ever Conference in 2018, where I got dinner with a handful of people, but one of the people at the table had just completed their first syndication deal. We were talking about kind of the process, and what he did, and just based off of his situation, and the fact that he did a deal, I told myself, “Well, I’ve been working with Joe, and I definitely have a lot more of an education foundation than he does, and I definitely have more experience as well with real estate…”, however the key difference was that he had a partner. So that was kind of the key that I was missing the entire time. It was like, well, if I don’t want to raise capital for a deal, if I’m too afraid to, sure, I could do sort of what Joe does and just get over that fear, and out of necessity do it, or I could just partner with someone who can raise money, and I can do everything else…
And there’s still obviously that anxiety, because if I’m doing the acquisitions and the operations of it, then I’m still responsible for the money that these people have invested in the deal… But I’m not the one that’s actively going out there and actually raising the capital. So what I did is based on the conversation with the guy at the Best Ever Conference, I decided to partner up with someone who had experience raising capital.
Now, the last reason why someone might be afraid of raising capital, and this likely applies to me as well, and it probably applies to you, and it might be a little harsh, but this is the Syndication School, so we tell the truth here… And that reason would be selfishness.
Here’s examples that we use again from the Best Ever Apartment Syndication Book; Joe came up with this analogy, and I really like this analogy. Imagine that you’re living in a town that has a plague that might wipe out 50% of the population; it’s a really nasty plague. Let’s say the Black Death has re-emerged in your hometown, and you happen to, for some reason, have the cure for this plague… But again, for some reason, the only way for you to get this cure out to the public is for you to go to the town hall, go up on stage in front of the entire town population, half of which are infected, and give a speech about how you came up with this cure. You basically have to sell the cure to them, because you’re some random guy, so how do they know the cure is gonna work? But let’s say you have stage fright, and you’re too afraid to go up on stage and present this cure to an audience, so you just decide not to do that because you don’t wanna be uncomfortable.
Obviously, thinking about it in that situation, of course you would go on stage and you would forget about the stage fright, and you’d go up there and you’d probably be afraid and sweating, but you still get over it, and present the cure and save the town.
Now, obviously, helping someone achieve their financial goals through apartment syndications isn’t as severe as a plague, because no one’s going to die; at least 50% of the population isn’t going to die if you don’t do a syndication… But it’s still kind of the same concept, because you have the potential to positively influence people’s lives in a positive way. Just by listening to this school, you are aware of the syndication concept. Now, it doesn’t mean you can do one today, or tomorrow, or a month from now, or even a year from now, but just the fact that you’ve been given access to this information is such a rarity, because not many people know about syndications. So since you’re one of the few people that know of its existence, then there’s no reason why you can’t put your comfort aside, put whatever it is you’re afraid of aside, and spend the next couple of years educating yourself, getting experience in order to raise capital for deals, and influence people’s lives in a positive way.
Obviously, you’re gonna influence your investors’ lives, because they’re investing in your deals, instead of investing in the stock market or in something else, or just not investing at all… You’re giving them a great opportunity to invest their funds into a large apartment deal and see some pretty solid returns.
Obviously, that will have a positive influence on their lives, but it’ll also have a positive influence on your close bubble of people that you’re close with, your circle of influence, because by you doing these types of deals, they could also obviously invest in those deals as well, but you’re going to have more money and more freedom to obviously improve the lives of those around you.
And then lastly, you’re going to positively influence the lives of people all over the world. A belief that Joe has is that people are inherently good, and if they actually have more free time, then they’re gonna be able to do more things. And if you are an apartment syndicator and these people invest in your deals, and are able to increase their passive income to a point where they can leave their full-time job, then they’ll have 40 hours a week extra to spend on doing good in the world.
So you really have no idea how much of a positive influence you starting a syndication business can have. Of course, the only way to find out is to actually do it, but these are just a couple examples of things that will be benefitted, that are outside of yourself.
Now, of course, if you need to be selfish, then you can still do apartment syndications and still raise money, and just instead of saying how much you’re going to improve the lives of others, you can say you’re gonna improve your own life, because obviously you’re gonna make a ton of money, too.
So I’m not gonna judge. At the end of the day it depends on how you are motivated. If you’re motivated by other people, then I would definitely focus on how you will positively influence other people’s lives. And if you aren’t, then obviously you can focus on your 12-month goal and your long-term vision, and how it will positively influence your life… But the best is to go with a combination of both – a little bit of selfishness, sprinkled in with a little bit of selflessness, and finding that right balance.
Again, we’re talking about how to overcome that fear of losing other people’s money… And if you’re just focused on yourself, it’s going to be difficult, because you’re going to focus so much on how it makes you feel, as opposed to how you overcoming that fear could benefit other people’s lives.
Overall, the ways to overcome the fear of using other people’s money to invest in real estate is one, it comes out of necessity, using Joe’s example… Two, three, four and five, which was my example, are sheer luck, really; just kind of putting yourself in the right situations. Number three, getting that experience and education to give you the confidence to do so, and to learn more about that, remember to listen to the episodes 1499 and 1500. Number four, we start talking to other successful syndicators to see how they’re overcoming that fear. And then number five would be to actually partner with someone… So rather than overcoming the fear, just have someone else do it for you. And then lastly, number six is be selfish.
The last thing I wanna talk about in this episode is to give you an understanding of why someone will actually want to invest with you. What do you think that is? Do you think it’s the types of returns that you offer? Do you think it’s the market that the property is in? Do you think it’s the business plan – value-add vs. distressed vs. turnkey? Do you think it is the actual deal itself? What do you think it is?
The answer is actually none of those. Obviously, those are reasons why people invest in deals, but that’s not the primary reason people invest in deals, and sure enough, the primary reason people will invest in your deals – and we’ve kind of hit on this earlier in this episode, during that five-question sanity test, is going to come down to trust.
A passive investor can get returns from anyone; each market will have a handful of syndicators they can choose from, there is a handful of syndicators that are operating the exact same business plan within that market, so the reason why they pick one syndicator over another is going to come down to trust.
Now, there are three main ways to gain trust, specific to this apartment syndication process. Obviously, there’s more ways to gain trust than just these three, but these are the three main ways to gain trust with a potential passive investor.
Number one is going to be time. A big thing that you see, again, on places like Bigger Pockets, with people asking about “How do I raise money for the deals?”, they’ll say that “I’ve done a couple deals in the past, fix and flips, or small multifamily deals, and I want to raise capital. How do I find investors?” And whenever I see a post like that, I always respond with saying that you just start with your current network. You need to start with people that you already know, because people that are going to invest with you are going to know you already and trust you already… Because since you don’t have experience, you can’t really leverage that experience in order to get strangers or people that you’ve recently met to invest with you, because there’s no proof that you’re going to be able to execute the business plan properly, and to get them their returns, and to keep their capital.
Whereas if you reach out to people that you already know, then you have that business background that you need, and that education foundation, they’ll know that, and they’ll know that maybe you’ve been trusting in the past for a certain situation… Or for some reason or another they’ve known you long enough and they trust you and they’ll invest in your deal.
Obviously, the first way to gain trust is going to be that time factor. you need to spend time with these people in order to gain their trust to invest. Back to the Bigger Pockets question about “How do I get people to invest with me?”, start with your current network, start with people that you’ve known for at least a couple of years.
Now, if you don’t know anyone at all, or if you haven’t known anyone for a couple of years, then obviously you’re gonna need to work on that first before you have the potential to raise capital. Obviously, you can get over this by partnering with someone else who does this, but this is specifically for you trying to raise capital yourself… The answer is going to be time.
Joe, for his first deal, knew his investors for 2 to 10 years. So these weren’t people that he just met in the past couple of months. It was people that he had built a relationship with over 2 to 10 years, and they trusted him enough with their money to invest in his real estate deals.
Obviously, now that he’s done over 10 deals, this time horizon decreases to maybe even a couple of months. As you complete more deals, the time horizon for how long you need to know someone before you’re getting their trust will decrease, because – this transitions to number two – of your expertise.
So the second way to gain trust is through your expertise. You display your expertise in a way that a potential investor understands. You’ve done a few deals, and now you know what you’re talking about, so you can set up a lead capture form on your website, for example, where people can contact you if they want to learn more about investing in your deals.
Or your ten investors starting out, you’ve done such a good job and you know what you’re talking about, that they refer you to other people, who in turn come and reach out to you to ask you about the deal, and since you know what you’re talking about, you can get them interested based off of their communication style.
For example, you want to make sure you obviously displaying your expertise in a way the investor understands; a salesperson understands differently than an engineer, who understands differently than a business owner, who understands differently than a seasoned investor. So if you’re talking to a salesperson, then you’re going to display your expertise a lot differently than you are to an engineer, who probably wants to know more about the actual numbers; or the salesperson wants more high-level, overview of the actual business plan.
So again, it’s not only displaying your expertise, but displaying it in a way that the person you’re talking to understands. Of course, if you’ve done a few deals, then that’s how you’re gonna be able to display your expertise, talk about those first few deals… But if you haven’t, again, this is where that past experience and education comes into play. You’ve got your past real estate or business experience, and you can talk about that… And obviously, you haven’t done a syndication deal yet, but you can communicate how you are going to be able to successfully execute the business plan based off of your past real estate and business success.
Also, a great way to display your expertise is through your thought leadership platform, which is something else we’ve talked about on the Syndication School. So if you’ve got your interview-based thought leadership platform, you’re talking to apartment professionals and people are listening to your podcast, and they look at you as a credible expert, because you’re out there talking to the movers and shakers in the industry… And I know I’ve said this before, but a lot of people will reach out to Joe, who are interested in investing, and they mention that they feel that they already know him because of his podcast.
And then lastly, you’re gonna display expertise through your team. You wanna use your expertise, but also your team’s expertise to gain the trust of the investors. Talk about their background, how many deals they’ve done in the past, things like that.
And then lastly, a way to gain trust is just the good old-fashioned personal connection… Because at the end of the day, people make decisions – and that includes investment decisions – based on emotions, not rationality or analytically. You need to figure out what they care about, and then see whether you can align with that thing in a genuine way. If you’re able to do this when you’re communicating with investors or potential investors, or just anyone you meet or know, is ask them what’s been the highlight of their week – maybe some business deal they’ve done, something with their family… Just to kind of build that personal connection.
And whenever you’re talking to someone that you think might be a potential investor, make sure that you allow them to lead the conversation. Ask them what’s been the highlight of their week, see what they say. Ask follow-up questions, see what they say. Obviously, the goal is identifying some need that they have, that you can provide a solution to, by having them invest in your syndication deals. So when you’re talking to investors, later on in the series we’ll focus on how to actually communicate and have these conversations with investors… But for now, the rule of thumb is the 80/20 rule, which is 80% of the time they should be talking, 20% of the time you should be talking… Again, with the purpose of identifying some sort of need that they have that you can provide the solution to with your syndication business.
Overall, the three ways to gain trust is time, displaying expertise and building a personal connection. That concludes this episode, where you took the five-question sanity test to gain your mindset as it relates to raising capital. We also talked about the six ways to overcome any fears or limiting beliefs you have about using other people’s money… And finally, we talked about the three ways to gain trust from potential investors, because the primary reason people invest is because they trust the syndicator.
In part two we are going to have a discussion about the different types of structures, because you need to know what type of syndication structure you’re going to pursue before you start reaching out to passive investors… Because the ways that you’re allowed to reach out to them, as well as the actual qualifications of the investor varies from structure to structure.
This episode has been more of a (I guess) story time, whereas this next episode is going to be pretty technical and into the details on the structures.
To listen to the other Syndication School series about the how-to’s of apartment syndications and to download those free documents, visit SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.