The formula for raising private money came to me as a result of learning how to raise private money to buy a business. These four parts are remarkably straight-forward. If you miss any one of the four, you hinder your chances of raising private money. On the other hand, if you master and apply all four – and make this your business to know and do – you will have access to all of the private money you’ll ever need to do more real estate deals or to acquire or expand a business that does deals for you.
Before I explain each part, let me emphasize that you have to use all four parts simultaneously. The power of the formula is that it speaks to the psychology of a private lender.
Part 1: Predisposed
By predisposed, we mean concentrate on predisposed sources of private money – people who already have demonstrated their interest in investing in real estate. There are three things that need to be simultaneously sold when raising private money: 1) the merits of real estate as an asset class, 2) the merits of our particular deal and 3) our self. By targeting predisposed sources, we have automatically reduced the sales effort by one-third.
Where do we find predisposed investors? Here’s a partial list:
- Self-Directed IRA Holders
- 1031 Exchangers
- Buyers at Real Estate Auctions
- Real Estate Clubs
- Past Sellers
- Past Brokers
- CPA and Attorney Referrals
- Friends and Family
- Hedge Funds
- Social Media
Part 2: Control
Private money sources want to know how they can get control if you don’t perform. So you want to show how they will have control. Acknowledge and concede their concern up-front. Show that you are pro-actively addressing their concern. This single act of addressing their concerns (up-front) will distinguish you from the herd.
Part 3: Low-Risk
Recall that both the second and third parts of the Raising Private Money Formula deal with the wealth psychology around preservation of capital, i.e. “Tell me first about return OF my capital before return ON my capital.” The third and complementary part of the Raising Private Money Formula is Low-Risk. Low-risk means that the private investors feel that their investment is secure.
Part 4: High-Return
So far, we’ve looked for people that are predisposed to real estate investing and we have shown how they can preserve their capital by building in control and low risk. Now once they are satisfied with that, they are now ready to hear about return ON their capital. And that’s the fourth element of the formula: High Return.
We want to offer an above market return but not give away the farm. We want to demonstrate a high return relative to the low-risk investment we have structured.
That’s the power of the Raising Private Money Formula. It inherently speaks to the psychology of the private investor. You structure and present your deals through the formula. The Raising Private Money Formula does the bulk of the work for you, even when you have no experience.