JF1570: How To Raise Capital From Private Investors Part 4 of 8 | Syndication School with Theo Hicks
Yesterday Theo gave us six ways to find passive investors for our apartment syndication deals. Today we’ll hear six ore ways to find our limited partners. If you’ve been following along with this series, you know how important raising money is for this process. These 12 ways to find investors are tested and proven to work by Joe himself. These tactics and strategies have raised enough money from passive investors to close on over $460,000,000 in apartment communities. 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 syndications. 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, and for the majority of this series we will offer a document, or a spreadsheet, or some sort of resource for you to download for free. All of these free documents, as well as the past Syndication School series, can be found at SyndicationSchool.com.
This episode is going to be a continuation of what will likely be a six-part series entitled “How to raise capital from passive investors?”
In part one you learned how to determine your current mindset towards raising money, as well as how to overcome any fears or limiting beliefs you have about raising money, as well as why someone will actually invest with you. In part two, you learned the differences between the joint venture and syndication strategy, as well as the differences between the two main apartment syndication offerings, which are the 506(b) and the 506(c).
Then yesterday, in part three, you learned three ways to find people to invest in your apartment syndications. Those were a thought leadership platform, Bigger Pockets and meetup groups.
This is part four, and we are going to continue to discuss various ways to find people to invest in your apartment syndications. We did three yesterday, and we have nine more to go, so hopefully we’ll cover all of those. If not, we will continue this series next week, with the remaining ways of how to find the passive investors, as well as start the discussion on what to actually say to these investors once you have found them. Let’s jump right into it.
Number four, the fourth way to find passive investors is going to be through volunteering. A strategy that has way more benefits than just you obviously raising money would be for you to find a non-profit that aligns with your values and interests, and then you go there and volunteer.
The ways to do this – you might have a charity or a non-profit in mind already, but there are a lot of good resources online that list out the charities in your local area. It’s as simple as googling a couple of things you’re interested in, with the word “volunteering” at the end. Hospice volunteering, or young entrepreneurs volunteering, or nonprofits, and finding some sort of nonprofit to actually go volunteer. The process of volunteering there might be different; I know Joe had to go through a couple trainings first before he did his hospice; I volunteered back when I was in Cincinnati for a nonprofit, and I had to do a background check and things like that.
So there might be some hoops to jump through, but the primary goal of volunteering is obviously to give back, to contribute to your local community… But your secondary goal is going to be to get on the board of the nonprofit. Again, longer-term strategy. You’re not going to work there for three months and then get on the board, but the reason why you wanna get on the board is because of the relationships you’re going to form with the board members. Because if you listened to yesterday’s podcast, all these strategies are about building trusting relationships with people, and if you are able to build trusting relationships with these board members, these board members are likely going to be affluent, which means that they are themselves a high net worth individual, and they know other people who are high net worth individuals.
Once you’re on the board, your goal is to genuinely form relationships with this person outside of volunteering with them. You wanna truly bond with these bond members personally, talk about your family and things outside of just work and actually volunteering.
Also, you’re gonna have the same approach for people that are volunteering this as well, but you’re doing this without expecting anything in return. You can’t go in with the idea that you’re going to build a personal relationship with them for six months and they’re going to invest with you, because 1) that’s not genuine, 2) if you do that and they don’t invest after six months, you’re probably gonna get angry and ruin the relationship, and that is proof that it wasn’t genuine in the first place.
So you wanna do this slowly and organically over time… And heck, if you’ve got time, you could repeat this for multiple charities. If you start looking into charities and there’s two or three that you’re really interested in doing, then just them all. But I’d start with one, and then kind of grow from there.
Again, the primary goal is to give back and to contribute, the secondary goal is to get on the board, because these board members likely have a lot of money, and will ideally invest in your deals eventually.
I guess one more thing about this, and really any other conversation you’re having with other people – we’ll get into this a little bit next week – you want it to be an organic transition to talking about investing. You don’t want at the first board meeting you go to, have an [unintelligible [00:08:07].06] agenda where you get to talk about your real estate business. You build a personal relationship first, and then it’ll naturally transition to them talking about their business goals or financial goals, and then you can learn about what they’re investing in, and how much the return is, and then that’s when you can mention what you’re doing. So let them bring it up. So that’s number four, volunteering.
Number five is going to be referrals. Again, this is not something that’s going to happen instantaneously, although it’s possible, but you’re going to follow one of these 12 strategies I’m talking about and find an individual to invest in your deal. Then they invest in your deal and you are able to provide them with the returns you projected, or ideally you’re able to exceed those returns, and they’re so happy with your performance that they mention to five of their friends about how great of a syndicator you are and how you’re making them all this money. Then those people will become interested, and their friends [unintelligible [00:09:07].26] the landing page on your website, they fill it out and you have a conversation with them, and then boom, you’ve got a few more investors added to your list.
Referrals is going to be a huge source of new investors, especially once you are established. All this work you’re putting in now is in order for you to get that snowball effect, and eventually the momentum of all of your previous work will allow you to have referrals begin to pour in, and then you won’t have to spend as much time focusing on how to find more investors, rather on how to cultivate the relationships we have with existing investors. Ideally, it gets to the point where you’ve got so many investors that when you send out a new deal, you’ve got the commitments filled up within a week, and you’ve got a very long waitlist of people who want to invest in that deal. Then that will allow you to start to increase the number of deals that you can do, as well as the frequency at which you do these deals. So number five is referrals. That’s going to be big once you’re established and have done a few deals.
Number six is going to be advertising. And again, this is something that you’re gonna wanna talk to your attorney about, because there are gonna be restrictions on the types of advertisements you can do for the 506(b) offering, whereas for 506(c) I don’t think there’s really anything – you can advertise as much as you want, but make sure you consult with your attorney first, and figure out which offering you’re going to do, and then figure out what types of advertising you can do.
But for 506(c) in particular, you are allowed to advertise your deals. So if you have a deal under contract, or you’ve identified a deal and you don’t have enough passive investors or enough verbal commitments yet, then you can create a targeted Facebook ad, or you can put an advertisement in the newspaper, or you can become a sponsor on someone else’s thought leadership platform or newsletter. Really any marketing strategy or advertising strategy that you would use to attract a customer, you can figure out a way to use that for your apartment syndication deal, and raise money.
Again, for any advertisement, before you actually create it, make sure you consult with your attorney first, and make sure you are in line with securities law. That’s number six.
Number seven is going to be your current network. For your first deal – and maybe your first few deals after that – the majority, if not all of your investors will be people you already know. These are people that you’ve known for at least a couple of years… Something that you’re going to want to do at this stage in the process is do a formal analysis of your current network in order to determine if anyone in your current network is a prospective passive investor.
Again, this will depend on whether you’re doing 506(c) or 506(b), because if you’re doing 506(c), you can only attract accredited investors, but if you’re doing 506(b), then you can attract sophisticated investors that you have a pre-existing relationship with… So more than likely – and again, consult your attorney first, but more than likely your first deal is gonna be that 506(b) where you are raising money from sophisticated investors that you have a pre-existing relationship with. And in order to do so, here is a process for formally analyzing your current network, with the purpose of getting them interested in investing in your deal.
This is before you even have a deal, because right now in the syndication school series we haven’t even talked about finding deals yet.
So this is before you have a deal – step one is to create a list of all of your personal connections. Really anyone that you’ve known for at least a couple of years. Anyone at work, anyone in your family, any friends, any extra-curricular activity that you do – this could be you’re volunteering, this could be if you’re playing on a football team, or if you play pickup basketball, the people you know from the gym, obviously people at work, but also previous jobs; this could be people you went to college with, people you went to high school with… Really anyone that you could think of that you had a relationship with for more than two years, write them down.
Maybe it’ll help by going to Facebook, and going to your friends list and starting there, and then maybe going to LinkedIn next and seeing your business connections and creating a list there… So create an exhaustive list in Excel of all the people that you know.
The next step is going to be to categorize these individuals based on how you know them. You have a category for family, you have a category for friends, but it should be more specific than friends; have a category for Cincinnati friends, and a category for college friends, and then a category for previous roommates, and then a category for people you know from your first job, your second job, your third job. You get the idea. Put every single person on that list into a category. That could be a few category, or that could be 20 categories, it doesn’t really matter. The more categories, the better, because that means you know more people.
Once you have them broken into categories, the goal is to get one person from each category to say “Yes, I’m interested in investing” or “Yes, I’m interested in learning more.”
Again, I will mention how to get them to say this next week, but once they’ve done that, then with their permission you want to namedrop that person to others within that category. For example, you’ve got your work colleagues, and let’s say you get Bob to become interested in investing; then you can go to Billy, and I’ll tell you exactly what to say, but you’ll namedrop Bob, and say “Bob is interested in investing.” Then they’ll think to themselves “Oh, Bob is interested in investing? Well, I know Bob is really smart, he’s a fiscally-responsible guy, so I’ll definitely take a look at this.”
It’s the concept of social credibility. We’re more likely to buy something/to do something that someone else that we know has already bought or done. We want to leverage this concept in order to get others in that category to become interested in investing in our deals.
For Joe’s first deal, as an example – the raised $843,000 from 12 different people. These are people that he’d known for 2 to 10 years, and none of them were actually family members, which is quite impressive. So three were colleagues from his advertising days, so people that we worked with through advertising. Two were from the Texas Tech Alumni Advisory Board; Joe was on the advisory board of the Texas Tech Alumni Association. Two of them were actually friends of his brother’s… So they don’t necessarily have to be — well, I’m sure Joe knew these people, since he grew up with them.
He also had a college roommate, and then someone that he lived with after college invest in his deal, as well as two high school friends, and then one person from his flag football team. Now, this is what you will do starting out, but it doesn’t necessarily have to be people that you know directly.
Another strategy is to tap into the current network of your friends and family. A really good example of this is one of Joe’s clients. He was able to raise one million dollars for their first deal, and $350,000 of that came from his wife’s network… Which naturally transitions into number eight way to find passive investors, which is to build relationships as a couple.
Joe’s client was able to build a relationship with multiple couples that his wife knew, [unintelligible [00:16:37].03] the conversation with their people in his wife’s network, and doing so, they were able to get verbal commitments, and then actual commitments of over $350,000.
Now, the reason why this is a great way to find passive investors is because building relationships as a couple will add an extra dimension to the relationship. So you’re able to establish trust quicker, and the bond is stronger because not only are you forming a relationship with the husband or wife, but your husband/wife is also forming a relationship with both of then, but more likely their significant other.
For example, if me and my wife were reaching out to people, maybe through her work, we would speak with them, eat dinner with them, and naturally the conversation would transition into investing… And since my wife already knows them really well, that gives me an extra level of credibility, as opposed to me approaching them and them not really knowing who I actually am.
So when you’re working with your significant other, and whether they’re already friends, or even if they’re not friends already, they’re more likely to invest.
A different example would be if I start to get interest from people in Tampa, and I start meeting with them in person, rather than me just meeting with Billy one-on-one, I’ll say “Hey Billy, do you and your wife want to go get dinner with me and my wife?” So me and Billy become friends, our wives become friends, and now we have a more trusting relationship and they’re more likely to invest.
Examples of these, as I said, could be dinner, but it could also just something as fast as drinks, and then as you build a strong relationship, you can actually do weekends away together – a trip to a lake house, or a trip to Las Vegas, or a trip to a real estate conference. It really depends… This is a pretty unique strategy.
Again, all of these strategies take a lot of time, and this particular strategy – you need to have a significant other to actually do this, but… I don’t see why you couldn’t do it with a really close friend too, but I think this would work much better with a significant other. So that’s number eight.
Number nine is going to be to partner. This is kind of a hack, where you don’t necessarily have to find passive investors, you just have to find someone to find passive investors on your behalf. This is what I did – I partnered with someone who focuses 100% on raising money and nothing else, while I focus on everything else. So I don’t have to really implement any of these strategies. I do have to keep an eye out for, obviously, potential passive investors and then send their contact information to my partner… But I don’t have to focus on money-raising strategies because I’ve got someone else to do it with me.
Additionally, it doesn’t necessarily have to be a business partner, but you could also partner with a real estate brokerage or a property management company, or a mortgage brokerage, and they could invest themselves, or they could also raise money.
During my conversations with various real estate brokerages, and — I don’t think I’ve found any property management companies, but definitely real estate brokerages and definitely mortgage brokers, who I obviously was talking to them with the purpose of the real estate brokerage to have them find me deals, and for the mortgage broker to have them help me secure debt for deals… But I did come across maybe two brokers and one mortgage broker who also said that they have a money-raising arm, so they can actually help me raise money for my deals. What’s good about that is there’s also an extra level of alignment of interest, because someone who has an active involvement in the deal besides you is also putting their money in the deal…
So the mortgage broker is investing in the deal, the real estate broker who found the deal is investing in the deal – alignment of interest between your team and your investors… And then of course, they themselves might actually invest their own capital in the deal, or they themselves might have some sort of discounted rate in order for an equity stake in the deal. So that might help you raise some money, but it really depends on the actual structure; if you’re just giving away equity, then of course that’s not helping you reach your funding goal… But if they’re going to bring money into the deal, whether through their company or they themselves personally, that is another great way to actually raise capital.
And then going back to the “partner with a money-raising expert”, there are a lot of people out there who could potentially sponsor your deal, and they could do more than just raise money for the deal, but that will just be one particular aspect of the services that they offer. So it doesn’t have to be someone that you partner up with and you guys do it for every single deal. It could be a one-off thing where for your first deal or for your first two deals you can find someone to find one of these sponsors who can help you raise money, and then once you’ve kind of established yourself and you’re able to start getting investors yourselves, you can go on your own. So that’s number nine, partner.
Number ten is a mentorship. When you get a mentorship – and again, this is a paid consultant who is an active apartment syndicator, and obviously is successful as well… Because one, they can actually teach you how to raise capital; so they could do what I’m doing, which is tell you how to do it, but then since they’re your mentor, they can kind of walk you through the process in more detail and make it more personalized to you, since you’re having a back-and-forth face-to-face conversation.
They may also bring you on the GP side of their own deals, and in that case you can raise money for their deals, but that’s good because you don’t need to raise 100% of the funds. If it’s a ten million dollar raise, obviously you can’t do that yourself, so you wanna be able to do the deal… But if they bring you on the GP, then maybe you only have to raise a couple hundred thousand dollars for the first deal, and maybe a couple hundred thousand dollars more for the second deal. That way you could implement your learnings without having to wait to actually execute a money raise until you’ve got verbal commitments of 5-10 million dollars; you can do it once you’ve got 50k, or maybe even one investor. Maybe they’ll just let you be the GP for one investor.
And of course, they will also likely have connections to help you raise money for your deal. They’ll know a business partner you can go with, a sponsor, or they themselves will sponsor the deal, or they can allow you to tap into their network of actual passive investors to fund your deals… Of course, likely for a cut of the profits.
Number eleven is going to be having alignment of interests. So structuring your deals to maximize alignment of interests with your passive investors will result in them more likely investing in your deal. Alignment of interests basically means that — of course, your investors’ interests are to make money, but if you or your team members don’t have any skin in the game, then the interests aren’t really aligned, because you don’t make money the same way that they make money, or your team members don’t make money the same way that your passive investors make money.
You want to have an alignment of interests where all parties’ ways of making money are aligned, or ways of losing money are also aligned. I wanna go over the alignment of interests in next week’s episode, because this is going to be a strategy for overcoming objections that passive investors have… And they’re gonna have objections, they’re not just gonna give you their money without any pressure or pushback… But we’re gonna talk about how to overcome these objections, especially when it’s your first few deals.
Number twelve, lastly – this is a combination of different strategies, but it’s to be creative. Think of creative ways to build relationships with high net worth individuals, or ways to create relationships with people who are interested in passively investing in deals. Here are just a few examples of what Joe does.
Number one, he will host a board game night with the local investors. Very simple – just investors playing board games at his house for a few hours, and getting to know each other better. He also traveled the country in 2018 and hosted happy hours for investors. Obviously, he’s meeting with the investors that are local to him, because that’s pretty easy, but in order to meet face-to-face with investors out of state, this was a strategy – he scheduled a night where he’d have a happy hour, and he’d fly out there and all the investors would come to the bar and they’d all hang out and drink together.
Joe also sends out monthly newsletters to his list of current and prospective investors. Anyone who’s on his e-mail list will get a newsletter every month. Of course, the people investing in his deals get updates on the deals every month, and then whenever he has a new deal, that gets sent out to the e-mail list… But additionally, anyone on that e-mail list, whether they’re an investor or not, will receive a newsletter. That again is actually something that we will publish interviews with other passive investors just to kind of explain to people what it’s like to be a passive investor, from the eyes of an actual passive investor.
Joe also has a passive investor FAQ page on the website. Essentially, it’s a page that will walk someone who has no idea what passive investing is, to figure out whether that’s a good strategy for them. If it is, what should they invest in, and if they choose to invest in apartment syndications, here’s everything you need to know about passively investing in apartment syndications.
Then we’re actually going to use that content, as well as feedback we’ve received from investors, as well as more in-depth research to create a passive investor handbook in 2019. That’s gonna be our book for 2019.
These are, again, creative ways specific and unique to Joe for how he builds relationships with these prospective passive investors. For you, you will wanna come up with your own creative ways, ways that aren’t on this list, and implement those. Of course, it’s gonna be trial and error, and you will learn what works and what doesn’t work as you progress through your career… But the more creative you are, the more personal it’s going to be, and the more trust that you’re going to build, because it’s going to be authentic and real.
So those are the 12 ways to find passive investors. In this episode we went through nine, in the last episode we went through three, for a total of 12. We’re going to provide you with a free resource with this series, and that’s going to be the money-raising tracker, which is a spreadsheet which allows you to input as you find these people and begin to have conversations with them, which we’ll go over in the next week’s series… You’ll want to input that information into your money-raising tracker, so that you know how much money you have in verbal commitments… Which, if you remember from the series about setting goals, you need to know how much money you’re capable of raising to set your 12-month goal, and in order to know how much real estate you can actually syndicate. To download that document, SyndicationSchool.com, or in the show notes of any of the parts of this series.
This concludes part four, and in part three and four combined we learned the 12 ways to find passive investors. In this particular episode we talked about volunteering, referrals, advertising, tapping into your current network, building relationships as a couple, partnering, mentorship, having alignment of interests and getting creative.
In part five and six you’re going to learn how to communicate with these prospective investors once they are found, as well as an exhaustive list of all of the objections and potential questions to expect from passive investors, and if they’re an objection, how to overcome that, if it’s a question, how to actually answer them.
To listen to parts one through three, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download your free money-raising tracker, visit SyndicationSchool.com.
Thank you for listening, and I will talk to you next week.Follow Me: