Raising Private Capital

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: July 25, 2024