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Raising Private Capital

Raising Private Capital

Building Your Real Estate Empire Using Other People's Money
by Matt Faircloth 2018 191 pages
4.20
100+ ratings
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Key Takeaways

1. Private Capital: The Key to Real Estate Empire Building

Private capital is a source of money that comes from an individual, not a bank or other financial institution. It is positioned in two ways, as a loan (debt) or ownership (equity).

Defining private capital. Private capital is distinct from traditional funding sources like banks or hard money lenders. It offers flexibility in terms of negotiation, win-win scenarios, and the source of funds. This flexibility allows real estate investors to structure deals that benefit both parties involved.

Advantages of private capital:

  • Negotiable terms
  • Aligned interests between Deal and Cash Providers
  • Access to funding sources like self-directed IRAs and real estate equity
  • Potential for long-term partnerships

Types of private capital deals:

  • Fix-and-flips
  • Buy, Renovate, Rent, Refinance, Repeat (BRRRR) strategy
  • Long-term rentals
  • Syndications and more complex deals

2. Becoming a Deal Provider: Building Your Reputation and Network

To live a bigger life, you need to learn how to be a bigger human being.

Personal development. Successful Deal Providers continually work on self-improvement, understanding their strengths and weaknesses. This self-awareness allows them to adapt to different investor personalities and build trust.

Building your network. Actively participate in real estate investing circles and general business networking groups. Seek mentorship opportunities and offer value to others. As you grow, consider becoming a thought leader through speaking engagements, content creation, and sharing your expertise.

Key strategies for Deal Providers:

  • Implement systems for finding, analyzing, and managing deals
  • Develop a strong track record and create a compelling marketing brochure
  • Under-promise and over-deliver on investor expectations
  • Communicate clearly and consistently with all stakeholders

3. Finding and Nurturing Cash Providers: Your Investor Base

You are not asking for money. You are providing an investment opportunity.

Identifying potential investors. Look within your existing network for individuals with investable assets, such as retirement accounts, real estate equity, or cash savings. Understand their goals, risk tolerance, and preferred investment vehicles.

Building relationships. Approach potential Cash Providers with confidence, focusing on the mutual benefits of working together. Educate them on investment opportunities and be prepared to answer common questions about returns, risks, and exit strategies.

Expanding your investor base:

  • Start with your core group (friends, family, colleagues)
  • Leverage referrals from satisfied investors
  • Gradually expand to broader networks through thought leadership and targeted marketing
  • Consider more advanced strategies like crowdfunding and private equity partnerships as you grow

4. Structuring Private Loans: Win-Win Scenarios for Investors and Providers

A personal guarantee is an extra step in providing additional collateral to a loan and is the most commonly requested type of collateral by lenders.

Key loan components. When structuring private loans, consider the source of funds, deal specifics, timeline, and construction requirements. Negotiate terms that benefit both parties, such as interest rates, payment schedules, and collateral.

Documenting the loan:

  • Promissory note: Defines loan terms and acknowledgment of debt
  • Mortgage security document: Binds the lender to the real estate collateral
  • Additional documents: Personal guarantees, deeds in lieu of foreclosure (as needed)

Avoiding common pitfalls:

  • Excessive loan origination points and fees
  • Monthly payments on fix-and-flips without adequate cash flow
  • Prepayment penalties and guaranteed minimums that limit flexibility
  • Closing without sufficient funds to complete the project

5. Equity Deals: Unlocking Larger Opportunities and Shared Success

Private equity investments are passive for your investors. They may have voting rights and some other benefits associated with owning an LLC and may even be responsible for personally guaranteeing loans. However, they are not active, meaning that they don't handle the day-to-day management of the asset or the property, nor do they inject any sweat equity for their ownership.

Benefits of equity deals. Equity partnerships allow Deal Providers to take on larger projects, mitigate risks, and potentially earn higher returns. They also provide Cash Providers with opportunities for passive income and wealth building through real estate.

Structuring equity deals:

  • Choose the appropriate entity structure (e.g., LLC)
  • Create a comprehensive operating agreement
  • Consider offering preferred returns or other incentives
  • Implement creative profit-sharing structures (e.g., waterfalls, preferred equity)

Key considerations:

  • Clearly define roles and responsibilities
  • Be transparent about risks and potential returns
  • Understand investor goals and risk tolerance
  • Implement proper accounting and reporting systems

6. Navigating SEC Compliance: Protecting Your Business and Investors

If the deal you are doing does not satisfy one of the prongs above, you do not have a security and no registration or exemption is required. If a sale of a security is involved, it's highly likely that you are exempt from registering it with the SEC.

Understanding securities regulations. When structuring equity deals, be aware of the four-prong test that determines whether an investment is considered a security. Most small-scale real estate investments are exempt from SEC registration, but it's crucial to understand and follow the rules.

Key compliance considerations:

  • Establish pre-existing relationships with investors
  • Avoid public solicitation unless properly registered
  • Understand the differences between accredited and sophisticated investors
  • Use investor qualification forms to document relationships and investor status

Best practices:

  • Consult with a knowledgeable attorney
  • Be transparent about risks and potential returns
  • Maintain clear communication and documentation throughout the investment process

7. Investor Relations: The Cornerstone of Long-Term Success

Investor relations is one of those important but not urgent tasks that will make a world of difference in your business growth.

Consistent communication. Develop a systematic approach to investor relations, including regular updates, newsletters, and personal check-ins. This builds trust, keeps investors informed, and can lead to additional investments and referrals.

Investor relations timeline:

  • Daily: Respond promptly to inquiries and urgent matters
  • Weekly: Schedule calls with new prospects, update social media
  • Monthly: Send project updates and newsletters
  • Quarterly: Provide detailed financial reports and performance updates
  • Annually: Host investor meetings or events, review and update strategies

Building long-term partnerships:

  • Consistently deliver on promises and exceed expectations
  • Provide educational resources and market insights
  • Seek feedback and continuously improve your processes
  • Show appreciation for your investors' trust and support

Last updated:

FAQ

What's Raising Private Capital about?

  • Real Estate Focus: Raising Private Capital by Matt Faircloth is a guide for real estate investors to expand their business using private capital instead of traditional bank financing.
  • Relationship Building: The book emphasizes building relationships with potential investors, known as Cash Providers, and understanding their needs and goals.
  • Practical Strategies: Faircloth provides strategies for finding, securing, and managing investments from private individuals, along with personal experiences and advice on structuring deals.

Why should I read Raising Private Capital?

  • Comprehensive Roadmap: The book offers a detailed guide for raising funds from private sources, covering everything from basics to advanced deal structuring strategies.
  • Real-World Examples: Faircloth includes numerous case studies and examples to illustrate principles, making it easier to understand and apply the concepts.
  • Expert Insights: As an experienced investor, Faircloth shares insights to help avoid common pitfalls and make informed decisions, emphasizing education and preparation for long-term success.

What are the key takeaways of Raising Private Capital?

  • Private Capital Defined: Private capital is money sourced from individuals, structured as loans or equity, offering a diversification from traditional bank funding.
  • Education is Crucial: Investors should educate themselves on real estate transactions, negotiation, and finance before seeking private capital.
  • Trust Building: Establishing trust with Cash Providers is essential, requiring investors to demonstrate integrity and reliability for long-term relationships.

How does Matt Faircloth define private capital in Raising Private Capital?

  • Source of Money: Private capital comes from individuals rather than banks, structured as either debt (loans) or equity (ownership).
  • Negotiability: Private capital agreements are negotiable, allowing customization to meet the needs of both the Deal Provider and the Cash Provider.
  • Win-Win Relationships: Faircloth emphasizes creating win-win situations, where the success of the Deal Provider directly impacts the returns for the Cash Provider.

What is the Cash Provider Pyramid in Raising Private Capital?

  • Three-Tier Structure: The Cash Provider Pyramid categorizes potential investors into Core Group, Referrals, and Public, helping investors identify where to start.
  • Core Group Focus: The first tier includes individuals who know and trust the investor, like friends and family, more likely to invest based on relationships.
  • Expanding Networks: Moving up the pyramid involves leveraging referrals and public outreach through social media and networking to attract a broader audience.

What is the "Cash Provider Enrollment Process" in Raising Private Capital?

  • Identify Investors: Start by listing potential Cash Providers from your network who might be interested in real estate investments.
  • Schedule Meetings: Emphasize face-to-face or video meetings to discuss opportunities, being prepared with goals, marketing materials, and deal analysis.
  • Build Relationships: Establish trust and rapport by listening to investor needs and concerns, tailoring your pitch to increase investment likelihood.

How does Raising Private Capital define "Crowdfunding"?

  • Online Platforms: Crowdfunding involves raising money through online portals where investors can browse and select real estate opportunities.
  • High-Profile Deals: Platforms often feature larger deals with substantial listing fees, requiring investors to understand the vetting process for profitability.
  • Future of Fundraising: Faircloth predicts crowdfunding will become mainstream in real estate investing, advising awareness of regulatory changes.

What are the "Private Equity Funds and Equity Brokers" in Raising Private Capital?

  • Professional Investors: These are professional investors seeking larger deals, requiring a long track record and specific terms before committing funds.
  • Higher Stakes: They may demand more equity and expect the Deal Provider to work harder for lower initial compensation, leading to larger financial opportunities.
  • Long-Term Relationships: Building trust and credibility with these investors can open doors to larger projects and substantial funding.

What is the "WIIFM" concept in Raising Private Capital?

  • Investor Needs: WIIFM stands for "What's In It For Me?" highlighting the importance of addressing investor needs during investment discussions.
  • Anticipate Questions: Be prepared to answer questions about benefits, objections, and best investment vehicles for each Cash Provider to build trust.
  • Focus on Value: Tailor your pitch to demonstrate how the investment aligns with the investor's goals, increasing the chances of securing funding.

How does Raising Private Capital suggest handling the "Fear of Asking for Money"?

  • Mindset Shift: Emphasize that you are offering an investment opportunity, not begging for money, to alleviate fundraising fears.
  • Take Action: Confront fears by taking action, as inaction breeds doubt and fear, while action breeds confidence and courage.
  • Build Confidence: Consistently presenting opportunities and engaging with investors builds confidence, reducing future fear of asking for funds.

What are some common pitfalls to avoid when raising private capital according to Raising Private Capital?

  • Lack of Preparation: Avoid approaching investors without adequate preparation and education, being ready to answer questions and present confidently.
  • Overpromising Returns: Avoid making unrealistic promises about returns; under-promise and over-deliver to build trust with Cash Providers.
  • Neglecting Communication: Maintain open communication with Cash Providers, providing regular updates and transparency about challenges.

What is the importance of "Investor Relations" in Raising Private Capital?

  • Building Trust: Regular communication with investors builds trust and strengthens relationships, keeping them informed about project progress.
  • Structured Updates: Send monthly or quarterly updates, including financial reports and project status, to keep investors engaged and reassured.
  • Personal Touch: Maintain personal relationships by reaching out on special occasions, showing appreciation for investor support.

Review Summary

4.20 out of 5
Average of 100+ ratings from Goodreads and Amazon.

Raising Private Capital receives mostly positive reviews, with readers praising its practical advice and insights on raising funds for real estate investments. Many find it helpful for understanding the mindset and requirements of private capital raising. Some reviewers appreciate the author's transparency and relatable stories. However, a few critics feel the information is too basic or lacks depth in certain areas. Overall, readers value the book's guidance on building a strong brand, structuring deals, and navigating the complexities of private capital in real estate investing.

Your rating:

About the Author

Matt Faircloth is a successful real estate investor and entrepreneur who co-founded the DeRosa Group with his wife, Liz, in 2005. Starting with a $30,000 loan in 2004, they have grown their company to manage over 370 units along the east coast. The DeRosa Group has completed more than $30 million in real estate transactions involving private capital, including various property types and investment strategies. Faircloth is an author and regular contributor to BiggerPockets, sharing his expertise through podcasts, webinars, and his book. He resides in New Hope, PA, with his family, continuing to expand his real estate empire and educate others in the field.

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