Every business needs capital for growth. Whether it’s the seed money necessary to get a new business up and running or the funds required by an existing business for a capital equipment acquisition, capital is key. This concept is equally important in the real estate business, as each transaction relies heavily on capital. Thus, the need for capital to transact real estate deals creates a significant place for capital raisers in the real estate transaction.
In our business, we’ve raised over $100 million in investor capital in over 25 syndication transactions. From these experiences, we’ve learned a lot about capital raising. I also mentor aspiring syndicates on this important aspect of their business. I’ll highlight three tips here to get you off to a good start.
Be Authentic
Let’s face it: Not many of us like sales pitches. Being true to yourself can greatly increase the likelihood of others wanting to work with you. An accurate, realistic message that shares your story, as well as your business model, is a critical factor in capital-raising success. Potential investors would rather know you and your business personally than be upsold.
Focus on keeping your message logical and simple while educating your potential investors. A clear, concise message that educates investors signals that you are knowledgeable, which will likely increase a potential investor’s confidence in you and your services.
Being authentic helps investors learn about real estate investing, but it also helps you too. As I’ve shared my expertise with investors and potential investors, I’ve paid keen attention to the questions asked of me. Those questions form a great sounding board for increasing my personal knowledge, and ultimately the knowledge of our investors as we strive to promote education. Always look for learning opportunities.
Raise 25% More Than You Need
In raising capital, if your goal is to raise $500,000, then I recommend you get 25% more in backup in case you have someone drop out. Your mental target should be $650,000 or $700,000. Expect to have enrollment drops, and plan for them. The better you get, the less dropout you’ll have because more of your investors will be return investors. But still, things can change, and someone who commits today may not be in a position to sign the documents and hand over the funds three to four weeks later.
It is important to keep your investors in high regard. Always remember that life happens during the capital-raising process. Lots of things can arise in people’s lives during this time period. An investor’s work travel schedule, health or family issues, job concerns, liquidity uncertainties and other life moments may change, which could divert a potential investor’s time and attention away from any given deal. A person who reserves a spot during the first week may realize during week four that they may not be able to participate.
My best advice to capital raisers who find themselves in this situation is to not be surprised, and to be empathetic toward the potential investor’s needs. One of the primary focal points of raising capital is to establish — and build upon — long-term relationships. That way, when the potential investors are ready, they will likely return to do business with you. Having the 25% backup will help keep you calm and in stride with the process, and reduce your stress and anxiety.
Take 50% First
Another recommendation that can improve capital-raising goals and credibility is to employ the 50% rule when you are working with first-time investors who want to make big commitments. Let’s assume that a person wants to invest $200,000 in a deal. You might suggest that the person invest $100,000 and put the rest on backup. This method provides the investor with more time to better understand your business model. It can also enhance your credibility with investors, as you are demonstrating a more reserved standpoint of your investor’s cash reserves while creating a backup plan for future funding. In addition, it can increase interest in — and demand for — future funding opportunities.
In summary, mastering these tips can help you increase your investor base, as well as retain existing investors through repeat business on future deals. In today’s competitive marketplace, these ideas can help you achieve a win-win-win: Not only will your organization benefit, but your relationships with sponsors and investors will also be strengthened as they benefit from your capital-raising activities.