JF1576: How To Raise Capital From Private Investors Part 5 of 8 | Syndication School with Theo Hicks
Ready for some more apartment syndication knowledge? Lucky for you, Theo has plenty more knowledge to drop on us today. We’ll be learning more about raising the money we need to complete these deals. Specifically, we’re discussing how to “court” the passive investors that you have found through the methods discussed in the last two Syndication School episodes. 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 podcast series 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. For the majority of this series we will offer a resource – document, spreadsheet – for you to download for free. All these documents and previous Syndication School series can be found at SyndicationSchool.com.
This episode is a continuation of what was supposed to be a four-part series, which turned into a six-part series, and now is likely going to be an eight-part series, entitled “How to raise capital from passive investors.”
In part one you determined your current mindset towards raising money, and you learned how to overcome any fears or limiting beliefs of this mindset that you have about raising money, as well as you learned why someone will actually invest with you, which comes down to trust.
In part two you learned the differences between a joint venture and a syndication, as well as the differences between the two main apartment syndication offerings – the 506(b) and the 506(c).
In part three we transitioned into discussing how to actually find investors. In part three we learned the first three ways to find people to invest in your apartment syndications, which was a thought leadership platform using Bigger Pockets, as well as meetup groups, and then in part four you learned nine more ways to find passive investors, which include volunteering, referrals, advertising, building relationships as a couple, tapping into your current network, partners, mentorship, having alignment of interests, and then getting creative.
For all of those 12 ways we either provided you with a step-by-step process for what to actually do, or gave you some high-level advice on how to approach that strategy. Then we gave away a free document, The Money Raising Tracker, so that you can begin to log the information of these people that you found.
In this episode you will learn what the next steps are after you find a passive investor, using one of these 12, or a creative way that you’ve come up with… And that is to set up an introductory call and then to execute that introductory call.
Once you’ve actually found an investor, as I mentioned in previous parts, your goal is to set up an intro call. Your goal is to get them on the phone with you. Now, this is gonna be accomplished with the fancy technology known as the e-mail. You’re gonna send them an e-mail with the goal of scheduling an introductory phone call with them. The e-mail content – what is actually within the e-mail – is going to be based on your understanding of this person, as well as your relationship with this person.
Let’s say you have your thought leadership platform and that’s what you use to find investors. A listener goes to your landing page and fills out their information, and says “This is my name, this is my e-mail, this is how much money I can invest.” Now you’ve got their e-mail address, so you will send them an e-mail. If you actually know this person already, you have an existing personal relationship with them, and you have previous real estate experience, whether that’s syndicating a deal already, of being a fix and flipper, or smaller rentals, or teaching real estate, or really any sort of real estate experience, here is a template that you can use. Now, don’t use this template exactly; adjust it based on your communication style, and obviously the examples aren’t gonna be the same for every single investor, but here’s an example of what I would send to someone I had an existing personal relationship with, based off of my real estate background. For some reason I really like the name Billy, so we’ll say I’m e-mailing Billy.
First off, I hope you’re having a wonderful week, and that your job is going well at GM.”
I’m gonna pause… “Your job is going well at GM” – obviously, you’re gonna wanna insert a personal reference that’s specific to them. “I hope your kid is doing well in basketball”, “I hope your wife is doing well”, because obviously you know this person already, so you can bring up something that’s a personal reference to them. Back to the e-mail:
“I’m writing to let you know that I’ve evolved my business to incorporate investors into the deals I do. As you might know, I’ve ________” Here you wanna insert your own personal real estate experience. For me, I would say “As you might know, I’ve acquired a personal portfolio of 13 rental units in Cincinnati, Ohio, and recently co-authored a best-selling book about apartment syndications. Continuing the e-mail:
“…and after doing that, I realize it makes sense to have a small number of people I know join me in the best deals I come across. I’d love to meet with you and learn more about your financial goals to see whether I can help you reach them. It’d be great to catch up, too.
Are you free ______? Either way, I wish you the best and I’m looking forward to staying in touch.”
So you’re not asking them for money, you’re not asking them to invest in a particular deal. The purpose is to just have a conversation with them, and get them to agree to going on the phone, and you’re suggesting a time and date, so that they don’t have to come up with one themselves. You’re explaining how you progressed from doing what you’re doing what you’re doing now, which is actually you doing something in real estate, to wanting to raise money for those deals. You’re basically saying, “I’ve had success, so I’m gonna share the success with others as well.”
Now, let’s say you have an existing relationship with this person, but you don’t have any real estate experience, you just have your business experience, because you need to either have real estate or business experience before becoming a syndicator; then instead of talking about your past experience, you would say – this is very unique, but you would say “I’m writing an article for my blog about lessons business professionals such as yourself have learned as they’ve evolved their careers. I’d like to include some of the lessons that you’ve learned in this article.”
Since you don’t have real estate experience to leverage, you shouldn’t even bring up the fact that you are going to be an apartment syndicator, or that you are interested in raising money. Instead, you want to just say that you’re gonna write a blog about them. That way you can get on the phone with them and then you can obviously interview them for your blog. Then you have them on your e-mail investor list, so as you start sending out your blogs, your podcasts, any new deals that you come across, they’re on that list and they will see them, and then maybe in the future you can follow with the previous e-mail, which is to invite them on a call to discuss their financial goals.
Now, the e-mail service that we use is MailChimp. It’s very simple and it should be free up to 50 e-mail subscribers; I’m not exactly sure how many, but starting out you get the free version, and then eventually once your list grows, you’ll have to pay money for it… But it’s a very simple service and you can create decent-looking e-mails without having to have any sort of design experience, because their guides are pretty straightforward. Plus, you’re able to link MailChimp up with your website, so you can have your lead capture form go directly to MailChimp, which is nice and saves you some time… So I recommend using MailChimp to create this e-mail list.
But anyways, once you have confirmed a time with them – and this is not for the blog strategy, but for the strategy where you mentioned your real estate background, so someone you have a pre-existing relationship with and you have a real estate background, you want to send them your company presentation, which you created and we’ve provided you a free template with in a previous Syndication School series.
Let’s say you send that e-mail and they say “I’d love to hop on a call. That day and time looks great, looking forward to it”, you reply with:
You’re scheduled for December 25th at 6 PM. In the meantime, I’ve attached the Hicks Acquisitions company overview to give you some background on my company. I’m looking forward to our conversation and we’ll speak to you on Christmas Eve.”
So we created that company presentation earlier, and that wasn’t just for you to look at yourself… Now we’re actually gonna use it, and we’re going to use it by sending it to our prospective investors. That way they can familiarize themselves with you, your company and your business plan before you do the phone call, which will allow you to focus on talking about them, and not reading the presentation.
Now, for your first few deals you’re likely gonna stick with a 506(b) and you’re going to have a pre-existing relationship with that, which means you have a pre-existing relationship with your investors, so these two templates, with and without real estate experience, should apply. But as you start to grow, and people that you don’t have a pre-existing relationship with reach out, the approach will be a little bit different. [unintelligible [00:11:54].06] being proactive with them, because these e-mail templates above are you being proactive with people you already know, or reactive to people who have filled out your contact form… But as you progress through your business, people will start to actually reach out to you, so you don’t really need to convince them to hop on a phone call with you; they already want to talk with you… Instead, it’s just figuring out a date and time that works best.
I’m sure eventually you’ll have so many of these inquiries that you’ll have an extra qualification process before hopping on a call. Maybe on the lead capture form there’s a section where it says how much money they can invest, or there’s a section that says “Do you wanna be passive or active?” Just things so that you can eliminate people who aren’t going to be good fits for your investment strategy.
Now, for the actual introductory call there are three keys to a successful call that Joe has learned from doing thousands of these things. Number one is to take a ton of notes. So before the call, open up a Word document, put that person’s name at the top, and then Enter, and then put the date of the conversation, and then Enter, and then Bullet Point. During the call, take as many bullet points as possible based off of what they’ve said; and again, anything that they’ve said. Then save that document with their name, and maybe have a folder for these investor conversations where you can put all the different documents for your conversations, and the next time you talk to this person you can open up that document, and obviously hit Enter, put today’s date, and then Bullet Point and then take more notes… But during the conversation you can bring up something that you have in your notes above.
Never underestimate how impressed someone will be if you remember what’s going on in their lives. During your first conversation, Joe’s go-to question is “What’s been the highlight of your week?” If they say “My son made All-Conference for football” or “I just closed on a big business transaction for the company I’ve been working on for two years, or six months…”, bring that up. I don’t know what you would say to follow it up, I’m sure you can figure it out, but bring that up during the next conversation.
Again, raising money is all about building trust with people, and if you actually care about them and remember them, then they are going to trust you more. So that’s number one, take notes.
Number two is to keep in mind that this is a conversation, not a presentation, so you aren’t gonna read through your company presentation slides; you’re not going to do a webinar where your company presentation is up and you go through each slide and say “Any questions on this slide? Any questions on this slide?” Number one, they’ve already seen the company presentation – that’s why we’ve sent it in the first place – but number two, if you’re presenting, that means you’re talking… And the goal of the conversation is to actually get to know them, identify their ideal investment, and then answer any questions they have. But if you’re presenting the whole time, then they’re not gonna have a chance to tell you about themselves, to tell you what their ideal investment is, and ask too many questions. So no matter what, do not present to them, do not read through the company presentation.
Number three is going to be the 70/30 or 80/20 rule, them to you talking. They should talk at least 70% of the time, whereas you should only talk at most 30% of the time. They need to talk, so that you can accomplish your goals of that conversation, which is to get to know them and their investment goals. Now, the only exception is if they obviously want you to lead the conversation. If you ask them about their background and they say “Oh, I’ve been interested in real estate for five years, I’m a pilot and I live in Tampa.” If that’s all they say, then obviously they want you to lead the conversation, so make sure you’re prepared to actually lead the conversation with questions to ask them, and based off of their answers to those questions, what you’ll say next… Because the last thing you want is a bunch of awkward silence.
Now, when you know what their investment goals are, which you will be able to accomplish by not talking and letting them talk, then you can match them up with the ideal investment solution. This investment solution could either be them investing in your deals, or you might have to refer them to someone else… But by taking the time to listen to them, speak with them, and then by giving them a referral, now they know what you do, and who knows, maybe a year from, two years from now, ten years from now they come back and invest in your deals.
So the two main questions that you want to ask the investor is 1) what is your background, and 2) what are your investment goals? So to lead off the conversation, you should ask them about their personal and investing background. So I’d say “Billy, tell me a little bit more about your background, as well as your investing background”, and then just let Billy go; let Billy talk as much as he wants. And I don’t know about you, but if people let me talk and ramble on, I guess kind of like these podcasts, it makes me like them more… And when you like someone, you trust them. So if you are allowing your investors to do all the talking, they’re going to like you more and trust you more, or at least like you faster and trust you faster.
At the same time, you are also deciding if you actually want to partner with them. This is less relevant when you’re first starting out; you should probably take anyone who is interested in investing. But eventually you might be interviewing them as much as they’re interviewing you, and you want a person who’s an ideal fit to invest in your deals.
Now, the two signs, or two red flags that you might not want to have someone invest in your deals is 1) contempt – if they show you contempt, or if you show them contempt, then it’s probably not gonna be a good idea… Because if things get rocky at all and you hold contempt towards them, or they hold contempt towards you, it’s not gonna be a very pleasant situation. And in fact, things might get rocky because of the fact that one party holds contempt for the other one.
Then another reason would be if they ask you a lot of accusatory questions that don’t convey that they trust you. So if they’re being kind of snotty and ask you questions that make it seem like they think you don’t know what you’re doing and that they’re better than you, and it’s not going to be a partnership, then it might make sense to pass, because again, if things get tough — or this might be the reason why things get tough, and that is not going to be pleasant.
So learn about their background, and then again, of course, knowing about their personal background will allow you to bring that up on a future call with them. But the next question, and probably the most important question, is to ask them what their investment goals are.
After they’ve talked about their background, whether that’s been for 30 seconds or for — I guess not an hour, but maybe 20 minutes, you wanna transition into asking them questions about their investment goals. So ask them first “What does a good passive investment look like to you?” One, that question eliminates any active investors, because you’re saying “What does a good PASSIVE investment look like to you?” and if they say “Well, I wanna be involved”, then you know they’re not a good fit for your deals… But also, it’ll help you understand what’s important to them.
They might say “I want alignment of interests”, or “I want 10% return on my capital”, or “I don’t wanna lose money”, or “I wanna be comfortable with the person and the team calling these shots.” Whatever their reason is, you want to focus the conversation on the aspects of apartment syndications that will fulfill those needs. Again, this is why you don’t present, because when you present, you’re telling them everything about the process, but most likely 90% of that stuff is irrelevant to them, at least for now, and they only wanna know why apartment syndications will help them solve their goals.
For example, if they say “The idea passive investment to me has a lot of alignment of interests”, I would say “Well, that’s great, because I personally invest at least $50,000 in all the deals, and I have a mentor who has a portfolio of over 450 million dollars in real estate who will be signing on the loan.” Boom! Two examples of alignment of interests.
Or if they say “I want an 8% or a 15% IRR, or an 8% cash-on-cash return”, I would say “Well, when we underwrite deals, we only submit offers on deals that have at least a 15% IRR, and at least an 8% cash-on-cash return to the investors.” That’s how you qualify the deals; I don’t ever wanna guarantee a return, because that’s not what apartment syndications is – it’s not a guarantee, it’s an offer.
The same things applies to “I don’t want to lose any money” – you can mention the strategies you put in place so that at the very least they will get their capital back at the end of the business plan. This would be the three immutable laws of real estate investing, which is buying for cashflow, not appreciation, securing a long-term debt, and having adequate cash reserves.
And if they say they wanna be comfortable with you and the team calling the shots, then you know that you need to discuss your team members, their background, you’re going to want to meet with this person more frequently than a person who just cares about making money… Again, as you’re kind of getting an idea, the reason for wanting to invest, or their idea of a good passive investment – that will determine how you will approach the conversation.
Now, you also want to learn what type of deal they prefer to invest in, if any. If they’re more advanced, they might say “I only invest in new construction, or distressed, or value-add, or turnkey.” And then you also wanna know how much money they might be interested in investing. You could ask the following question – “If I find something that I think you might be interested in, what would be the range of investment you’re looking to do?” Because if you don’t ask them how much money they’re willing to invest, you won’t know how much money you’ll be able to raise, which means you won’t be able to set a goal, you won’t be able to set an investment criteria, and things like that. So “If I find something that I think you might be interested in, what would be the range of investment you’re looking to do?”
Now, from there you can include the conversation, see if they have any other questions based off of your company presentation, but these conversations can really be anywhere from a few minutes, to half an hour, to maybe even an hour, depending on the person. The shortest phone call that Joe has ever had, that resulted in the highest investment, was when he had built a relationship with someone via e-mail before; they had to go back and forth for a while, until this person finally agreed to hop on a call with Joe. The call was about eight minutes, where Joe learned about his background, and then the investor asked Joe what he had… To which Joe replied, “I happen to have a deal, and I will share that information with you.” That person ended up investing $100,000.
So sometimes it’s just that fast – quick phone call, boom, 100k in the bank – whereas other times you might be on the phone with them for half an hour or an hour, they ask you a ton of questions, but they never invest… Although “never” is probably not the right word, because you never know. If somebody doesn’t invest for five years, they haven’t invested yet, but they still might invest in the future, so… Unless there’s contempt or accusatory questions, or unless they’re willing to be active, then it’s worth having a conversation with them, especially upfront, for your first couple of deals.
This concludes part five, where you learned how to set up the intro call with prospective investors. You learned the three keys to a successful intro call, which were take a ton of notes, it’s a conversation, not a presentation, and the 80/20 or 70/30 them to you talking… As well as the two main questions you want to ask the investor during the call, which were “What is your background?” and “What are your investment goals?”
In part six, we are going to discuss how to overcome passive investor objections. It’s your first deal, you’ve never done this before – they’re likely going to have objections to giving you their capital, and we’re going to discuss how to overcome that challenge.
To listen to parts one through four, as well as to other Syndication School series about the how-to’s of apartment syndications, and to download your free money-raising tracker spreadsheet, visit SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.