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While finding the right deal in the right market is critical to achieving success as a syndicator, the ability to raise capital is equally, if not more, important. I’ve found that having capital from investors in place before you have a deal in hand is the best way to ensure success.
There are several reasons why you should start raising capital before you have a deal:
Investors need time to adjust. When you are just starting out, it takes people time to “process” that you are syndicating deals. Especially if you are still holding a full-time job, the likelihood of someone you know investing with you right away when they are not used to seeing you as a syndicator/investor is low.
It takes time to educate investors. Many investors have little knowledge of passive investments or syndication, so you’ll need to do some educating about how the process works, the fees you charge and what returns can be expected on investments. Doing this before you have a deal to present is critical when time is of the essence — you want have that luxury while the clock is ticking on a pending investment.
It takes time to build relationships. Not every potential investor is ready to join you as a syndicator. They may not know you or your track record. In addition, it takes time to build a relationship that’s based on trust. The earlier you can meet and let potential investors get to know you, the better.
You’ll also need time to screen and assess your potential investors, just like they will need time to assess you. Many potential investors simply aren’t interested in participating in multifamily real estate syndication. I know I’ve spent a lot of time with potential investors only to learn their only investment interest was in the stock market.
Having your foundation for raising capital in place prior to signing a deal may be an easy concept to grasp, but developing that foundation takes planning and hard work. I’ll share some of the steps I’ve taken to develop that foundation in an effort to help others who are just starting out.
Step 1: Decide what type of investor you will target.
This is a key decision. There are two types of investors: accredited and non-accredited investors. This is important because when someone invests in a multifamily property, they’re actually investing in a security because they own shares in an entity that owns the property. Those shares are considered securities.
Non-accredited investors can also participate if they are “sophisticated investors.” According the SEC’s Regulation D, Rule 506, sophisticated investors are those who have experience and knowledge in financial and business matters that allow them to evaluate the risks and merits of a prospective investment. You’ll also have to have a preexisting relationship with each investor. The time to build that relationship is long before you have a deal to offer. I’ve decided to work with both types of investors, and that has meant spending time building relationships with them.
Step 2: Find investors.
Now that you understand the need to build your foundation for raising capital early on, I’d like to talk about finding investors. This seems to be the biggest hurdle for most new syndicators, but it doesn’t have to be.
Understand that people invest in people, not the opportunities that are presented. Investors have to like you, but more importantly, trust you, so start by reaching out to your own power base. It could be colleagues, friends, coworkers, family or people you’ve done business with in the past. Let them know you’re syndicating real estate opportunities and arrange to meet with them.
Whether you’re successful with these people or not, ask for a referral to others. I’ve had a lot of success attracting investors who were complete strangers simply because they were referred by a mutual acquaintance. Ask for multiple referrals, especially from friends and family members.
Go outside your contact lists by attending events, such as those organized on Meetup.com. Look for real estate groups by city, and narrow your search even further by looking for “multifamily real estate investing” meetups. You’ll also meet potential investors at Real Estate Investment Association (REIA) meetings. It’s an excellent way to network and form relationships with high-net-worth individuals. I’ve started a monthly meetup called “Santa Monica Passive Investing Club” where I’ve met many passive investors who later invested in my deals.
Step 3: Develop an online presence.
Another important and effective way to find investors is to build an online presence. Build a website that showcases your background. Additionally, use online media to promote yourself as a trusted advisor; write articles, host a podcast or share your thoughts and knowledge via posts on LinkedIn and Facebook. Focus on topics and subject matter that would be of interest to potential passive real estate investors, and show that you’re knowledgeable in the multifamily arena. I’ve built a website, a professional Facebook, Instagram and LinkedIn profiles and a YouTube channel, and I host weekly podcast called “REady2Scale.” All of these platforms generate leads that convert to passive investors who invest in my deals.
Summary
Building a foundation of investors and having them in place before you have a multifamily deal is critical to your success. Too much time can elapse between when you’re presented with an investment opportunity and when you actually get investors to agree to the investment. Decide whether you want to work with non-accredited investors. Then screen and educate potential investors so you can build a level of trust. Look to your power base, family and friends for potential investors and be sure to get referrals. Develop an online presence to starch your reach. This way, you’ll be ready to present your opportunity to a qualified group of people who trust you.