Raising Private Money

Raising Private Money

I had a real estate investor friend of mine who is looking to crack the code on using other people’s money, ask me if I could come up with a letter to help get a private loan from a friend of his. I pondered what the letter should look like; I thought about the pros and cons of a letter; I considered if such a letter was even legal. How could I write a letter while staying SEC compliant and not solicit to people whom I have not verified as being accredited? I asked myself such questions as: How effective would such a letter be? How well will this work? Then I decided against it. I thought to myself, “What would I think if I got a letter like this from someone? Would I call him back?  If this was my friend, could this endeavor make me feel awkward with this person?”  For all these reasons, I decided to tell this investor, “No, I will not help you write a letter for your friend because I don’t believe the letter will be very effective, but what I will do is tell you what you need to know to get another investor interested, then asking questions, then getting intrigued, then begging you to take his money and asking if you have any more deals that he can loan on.”

I have found that the most effective way to raise money for all the deals we have done through the years is by having face-to-face conversations, talking about what I do and how it is working out for me.  If you have ever loaned money and gotten it back from an honest investor, you know how awesome you feel when you realize that your money is working just as hard as you are, and you recognize that it is the easiest money you have ever made!  So the fact that you are sharing what you do with others should not be something that is hard or scary; in fact, I would almost feel guilty for not sharing what I do with my friends.

Think about it…if your friend knew such life-changing information and didn’t tell you, how would you feel? I would be upset! People are always asking, “What’s new?” or “What have you been up to?” So tell them! Take the opportunity to share the fact that you are doing real estate deals that you’re very excited about. Then add something like, “You will not believe the deals and profits I’m seeing!  If only I had more money.”  Say that enough times, and your prospective investor friends will say, “Man, how much money do you need?” or “What is the minimum investment needed to do a deal?”  Talk up real estate deals whenever you are around friends, family, associates or business colleagues.  I became financially free last year, so I personally find this conversation to be very easy, and it’s awesome to pop this topic into a conversation every once in a while.  You could say something like, “I am only $4,000 (or whatever your financial freedom number is) a month away from financial freedom.”  This information is sure to get some attention!

If you want to market to a list of people, I would suggest calling individual prospective investors directly and offering to take them to lunch; tell them you want to catch up with what is going on in their lives.  This is a different approach.  Instead of talking about you—here is what I want, or what I can offer, or what I am trying to sell to you—you are talking about them. Most people don’t want to be the object of a sales pitch, but they do like talking about themselves.

Lastly, I need to warn you because there is so much misinformation. There are SEC regulations that you need to know. A loan is an investment. A loan is also a security, based on the definition in the Securities Act of 1933.  Many states, including my home state of Indiana, have laws defining a mortgage as a security.  I am not saying you should not use private money, however, you should be aware there is some risk involved from a legal standpoint.  Mainly, do not market to prospective investors. I do not recommend pooling your money without a fund or a PPM. Fully disclose everything to a prospective investor.

  1.  You cannot market to prospective investors. I am not an attorney and do not even play one on TV, but a general rule of thumb is that you need to have a personal relationship with your lenders. A relationship should at the least consist of having met for lunch a few times and having met face to face, and knowing more about them than just where they live and the fact that they have enough money to loan to you. Only if you have a fund (and only some funds) can you market—be careful!
  2. Only present lending opportunities to people with whom you have a relationship; i.e., get to know your prospects before you start offering private lending opportunities. This makes complete sense, and honestly, is in your best interest as well. A private lender is essentially “going into business” with you on a particular deal. You want to make sure you get to know the lender, and vice versa before he puts up his hard-earned money for you and your company. Remember, you need to trust the lender just as much as he needs to trust you. Do not treat developing a relationship with a lender like you are searching for money, but like you are telling your friend about opportunities—you may offer him one if you feel he is a good fit!
  3. Be honest and upfront with the way you represent yourself, your company, and your investments, and fully disclose all risks and details of what your private lenders will be investing in. I like to present the worst-case scenario first. I tell the prospective lender that the worst-case scenario could be that he may have to foreclose on me. If for some reason I go crazy, he gets the house back at 65% LTV that he can sell and possibly make more money on. On some deals, the worst-case scenario is actually the best-case scenario. Remember, “Do unto others as you would have others do unto you.” Some people feel like they need to hide certain bits of information from their private lenders regarding the risks of a deal—DON’T! Your lenders will appreciate you for being upfront; furthermore, the SEC requires that you fully disclose any risks of the investment. Also, disclose what you are going to do with the funds and the details of the investment. THEN do what you say you are going to do at all costs!!
    1. Protect the investor (the private lender) without fail, including that the investor has the financial means to invest their funds in these types of “non-traditional” investments. And make sure they understand it!
    • Make sure you get a title policy and inform the lender of this.
    • Make sure you name the lender as additional insured/loss payee and inform the lender of this.
    • Never take an investor’s last $50,000.
  4. For your sake, spread your risk. I would rather have twenty lenders that each owe me $100,000 than one lender who has loaned me $2,000,000 of his money. Having all your eggs invested in one financial basket is never wise. You need to be aware of the control that one person could have over you if he ever goes crazy.
  5. Never need money. If you need money, or in any way come across like you do, then you will not get money. You need to convince your friend and yourself that you don’t need his money because there is so much money out there that you can always get money—it’s the deal that’s hard to find!

Plant the seed.

Getting lenders is all about planting seeds. Some of your efforts will land on dry, cracked soil and will never go anywhere; however, some of your efforts will land on fertile soil that just needs a seed, a bit of water, and some sun in order to grow a strong financial relationship. Steer as close to these steps as possible, and you will reap success.

Understand what you are offering. Understand the paperwork and the process so you can explain. If you’re planning on offering 8% on $100,000, know up front what the interest only payment will be. Know, and like, and trust your friend.

  1. You need to believe in what you are offering; if you do not believe in it, you will never get anyone else to believe in it. Remember, you will attract who you are and what you believe, not what you want.
  2. You need to spark a prospective lender’s interest enough to get him to ask questions. Tell him what you are doing and how happy you are with the returns on your loans. This is easy for me because I know the lender is the best seat at the real estate table. I love to say things like, “I LOVE LENDING!” Try to get him to ask questions. Never be the first to suggest that he does a lending deal! If he doesn’t ask questions, I would hold off.
  3. Ask him how his investments are going now, and if he is happy with them. Let him talk. Listen.
  4. When he starts asking questions, tell him what you are doing and be passionate about it.
  5. Ask him what his financial freedom number is, and if he doesn’t know what that number is, ask him if he has ever played the game “Cash Flow.” Then you can explain how the financial freedom number is just the number to get you out of the rat race. The financial freedom number is the amount of money that one needs to retire with no other investments; it is basically the cost of your lifestyle. If you knew this much money was coming in each month, you would be set. Explain to the prospective lender that you don’t want a pile of cash; what you want is a bunch of little cash machines that just spit out cash each month.
  6. Ask what the plan is to get out of the rat race or to have financial freedom…then listen. Most people have never thought this way, and the questions are very thought provoking.
  7. Try to build a plan to help him reach his goals. The discussion should be all theoretical. You have to figure where he is now financially, where he wants to go financially, why he wants to go there, how is he going to get there (this is the creative part for you), when is he going to get there, and the last part of the plan is, what steps does he need to take right now to make this happen. I said to help him build this plan, but what I mean is, ask questions to help your investor build the plan. If you can get to this point with people, they will be begging you for deals. Think about it—you just showed someone how he can have financial independence. If he doesn’t know, like, and trust you by now, then you don’t want him to loan you money because he doesn’t see the value of the wisdom you just brought to him, and he most likely won’t until he is out of money, and then you can take him to #8.
  8. Teach him what I just taught you.

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