Tuesday I shared with you how you can use loans to fund your real estate investing activities. Another way to finance a growing real estate empire is through real estate investors.
What Real Estate Investors are Looking For
Attracting real estate investors for your project is not much different, at a high level, than any other type of Marketing. To be successful, you need to understand what your target market is looking for in order to feel comfortable investing.
ROI
Investors look to real estate for a strong return (this is foremost in any investment) and the potential tax benefits. The return comes in the form of a renter/lessee paying down the principal as well as the appreciation in value that the property should experience. All of that adds up to form a return on investment, or ROI, that the investor is looking to earn. Keep in mind that if the ROI is too low, compared to other investment opportunities of a similar risk profile, the investor is likely to choose another project.
Security/Stability
In general, real estate investors see real estate as a fairly secure and stable investment. Especially when compared to investing in things such as cryptocurrencies, which were down between 10-17% yesterday. Ouch.
While real estate does not generally have the same level of upside as some assets, it also doesn't have the same level of downside.
Experience
If this is your first time managing a real estate investment project then it will be harder to attract investors. Investing in any is all about managing an acceptable level of risk. The less experience you have then the more risk there is in the project. People with experience managing real estate projects understand those risks which include managing for things such as overages in the budget, lengthening timelines, etc.
Something else to consider is that investors are putting money into your project because they either don't have the experience themselves to manage such a project or they don't have the time. If they have the experience and the time then they don't need you.
What You Will Need to Approach Investors
I recommend you treat real estate investors just like you would startup investors. That means having the right documentation prepared to be able to share with them.
When I worked with Anita, you can read her testimonial below,
we prepared a pitch deck and projections that she could use in her early conversations with investors. Some investors even ask for full-blown business plans. Anita's documents, and another client I worked with on a similar project, called out a lot of information about the surrounding area, growth of the area, the number of available houses, the number of renters, and so on. All to demonstrate the scope of the opportunity.
Assuming you already have a property selected to invest in you are going to need some items specific to that property. Especially if you are investing in commercial real estate. Then you could need things such as a survey, a plot map, and an environmental report.
Other Items to Consider
Your single-member LLC or sole proprietorship status won't cut it when raising money from outside investors. You are going to need to legally incorporate your business in a structure that will work for outside investments. I recommend talking to your accountant and attorney, but based on experience that structure is likely a full C-corp or an LLC.
One last thing you need to consider is whether or not your will need to have a Private Placement Memorandum (PPM). Again, talk to your attorney. But, in general, if you are raising money from a select number of accredited investors then your fundraising could fall in line with some of the fundraising exemptions that allow you to skip preparing such a document.