Essential to the initial existence and survival of any business is the ability of the proprietor (s) to raise the capital necessary to fund the requirements of the business. In the real estate parlance, it is highly important as it enables the sponsor to grab opportunities as they come. In the absence of sufficient capital, the proprietor(s) or sponsor (s) of an establishment can best be said to be out of the game. Hence, the saying – No capital, no deals!
It must be noted that the best means of getting capital when the prospective proprietor or sponsor has limited experience is by getting in contact with people who know you and can trust you. No one is willing to commit money into a business which might fail (given the damning statistics of start up failures). Your contacts for such capital should be people who know your work ethics, history, commitment to work, determination to succeed as well as the passion you put into getting deals completed. This is a very important way to start sourcing for the capital you desire.
Having gotten the knowledge of that, the other question that comes to mind is – How can one ask for capital from people one knows?
The question is pertinent, as a lot of people consider the possibility of overstepping one’s boundaries when it comes to asking for financial assistance. The fact of the matter is that, although, you are asking for funds from those people, on the flip side, you are actually presenting them opportunities to make more money if they wish to go along with you in the business.
At this point, it must be stressed that you must assume adequate control over what type of business structure you wish to run. You must be aware of either borrowing the money for capital to be refunded or selling them equity (making them become shareholders in your business, in which case, you do not pay back the amount contributed in cash, rather, they get returns on their investment). The difference between accredited and non-accredited investors in your business should be well explained to your friends and family while you approach them for capital. Usually, accredited investors earn about $200 thousand per year; on the other hand, their net worth is usually about $1 million or more. On the reverse side, one can solicit funds from up to 35 non-accredited investors (Number of non-accredited investors sought should not for any reason exceed this number).
Below are some number of steps you would find useful:
- Constantly interact with investors: It is quite important that you do not employ a fire brigade approach to sourcing capital. This implies that you should not wait until there is a deal in hand before you start running helter skelter in search of capital. Rather, be pre-emptive and proactive in your approach. The earlier you engage your sources, the better. This is because, once a deal lands, there is usually not enough time for fundraising. That is when you would discover that almost everyone you meet has firm commitments which almost no one of them would be willing to bend for your cause. On the flip side, if you have primed some sources about your possible moves and need for financial support, all that would happen is a breezing movement through the deal, no slows, no stops!
In preparation for such proactive moves, it is important that you highlight the financial options available to you and think of possible questions that might be posed at you by family and friends when you approach them on the matter. You should also prepare to answer those questions adequately (with facts and figures if possible). Such questions could include items such as:
- Are you into this business on your own?
- Who else is on the team?
- What market(s) do you plan to invest in?
- What / Where is your business plan?
- What returns should I expect?
- Do you know about syndication? How does it work?
- Am I allowed to participate despite not being an accredited investor?
- What is the minimum investment?
All of the above are aimed at announcing to your target audience that you are involved in the real estate syndication business. Therefore, as a sponsor, you would need to tell your friends and family that you have come across an ideal opportunity for passive investors (since they would not be actively involved in the conduct of the business as you are). Just this simple information passed to them is effective in changing their perception about you; it fosters credibility and demonstrates to them that you have acquired adequate business skills and ability to do what you said you have embarked upon. This is a very important trust to acquire as it would go a long way in boosting your investments in the future.
If on the other hand, you are working with a very tight budget and have limited experience, there are still a number of things that can be done to build your business. Make good use of those tools that are available to you at the moment and climb up the ladder of development one step at a time.
- Enlighten your Audience
It remains a fact that a lot of people who have not been passive investors and those who have never invested in real estate business are ignorant of what the real estate business is all about. Thus, you need to play the role of teacher and educator on the subject matter. You need to educate them on syndicates work, mechanism of the deals and convince them on the reasons why you are the right sponsor or syndicator they should work with.
The teaching process you engage in to educate you audience goes a long way in personalizing the syndication process in such a way that the audience are ultimately carried along and open to your ideas to them about the business. It is important that you always explain in exact terms and plain language, how the funds you are requesting from your audience would be used. The details of the information must include: The total amount you need, funding milestones and a timetable detailing the spread of the money over the next few to several months of the investment must be provided. All these promote your credibility and improve your audience’s commitment to the investment plan.
- Make an Estimate of the Amount of capital you can raise
You need to ask your target audience (e.g family and friends) of their investment potential after you have enlightened them about the real estate syndicate. It is important that you have an idea of how realistically they can afford to invest in business opportunities you bring to their attention. Having this idea about all your potential investors would amount to having an idea of how much capital you have the ability of raising should a business opportunity present itself. It is important to note that, the idea you have about how much you can raise would help greatly in sorting business opportunities as they present themselves (you simply know which you can afford and which of the opportunities you cannot venture into)
- Send Offers to Potential Investors
Immediately you have landed a deal, it is important that you send emails, text or call your potential investors and present the opportunity to them! This process would be expedited if you have constantly been in touch with all your potential investors prior to the time the business opportunity presents itself to you. This would ensure that you do not have a shortage of investors for the deal at hand! It is advised that you communicate such offers through any medium that you and the potential investor are both comfortable with.
Even if there is no deal at hand, you could discuss offers you have had in the past with potential investors and you could also discuss the markets you are looking forward to investing in, as well as some of the deals you declined with reasons why you took such decisions. All this discussions keep your relationship with potential customers alive and it also serves to show your thought processes (in an acceptable manner) and demonstrate your knowledge about multifamily deals, real estate markets as well as communicate the overall soundness of your decision-making process.
- Rekindle communication after a deal is closed
Despite the essential nature of this step, it is often ignored by most sponsors and proprietors. It is is quite essential in the building of future investment relationships and interactions which would would result in greater business collaborations in the future. It is important for you to reengage with the members you struck a deal with a previous time. The aftermath of such interactions is that it enhances the investor’s remembrance of you whenever they are thinking of engaging in other deals. It is also that you keep everyone involved in the syndicate updated on the progress of the deals you have struck as well as the various steps you took in successfully furnishing the considerations for the deals you have completed in the past. It goes a long way in demonstrating your knowledge and skill set which positions you to handle the coming opportunities as they present themselves.
Tips on Budgets
It is essential that you focus on raising 20% more than you think you would actually need to make a viable deal. This would save you the stress of having to scramble for funds at the edge of the close of a deal, which might make investors lose their confidence in your ability to properly handle their investment in your real estate syndicate.
The best place to obtain capital for your start up real estate syndicate is no other place than from your family and friends. Intimate them on the peculiarities of your business early enough, enlighten them and explain to them in clear terms what you intend to do with the money to invest or borrow you. Also strive to rise more than the amount you actually need for the business. It saves!