One widespread myth of commercial real estate investing is that you should start small, maybe flip or wholesale a few houses, own a few rentals or duplexes, all while using your own money to build up your assets to do bigger deals later. Many newbie apartment building investors mistakenly think that they need to use their own money to invest in multi-family properties. They say “I don’t have enough money and I don't know anyone with any money.”
This may very well be true, but don’t let that stop you! In this article I want to show you how to find investors who want to invest with you and in your commercial real estate deals.
The truth is that the people you already know either have money of their own or know someone who does. And worst case, even if those people aren’t interesting in investing with you, they can at least refer you to someone else they know.
The take-away from this article is that you should simply talk to everybody about your ambitions to invest in apartment buildings.
How should you go about doing this?
Make a list of your family, friends, neighbors and co-workers. Intentionally look for opportunities to say something like “I’m putting together a group of investors to purchase an apartment building. I expect returns to be between 10% and 15% per year. The minimum investment would be $50,000. Do you happen to know someone who might be interested in something like this?”
Your friend might be interested himself – great! But if not, he might be able to refer you to someone else. Then follow up diligently and keep your friend posted on progress. Always ask everyone for another referral. It’s surprising who the people the people you already know can introduce you to.
If you get interest from someone, schedule a meeting with that person. If you’re concerned about what to say in that meeting, read the article [LINK] which describes exactly what to do.
Here are some final tips:
- In your elevator pitch to potential investors, always mention the minimum investment amount. That way, if they accept your meeting, they’ve already expressed interest in investing at that amount and hopefully you’re not wasting your time with someone who doesn’t have the money to invest you’re looking for.
- Don’t judge a book by its cover. It’s really hard to tell who has money and who doesn’t. I spoke with “wealthy” people who had no interest or money to invest because they were busy making payments on their mansion and boats. On the other hand, “little old men” who look like they came directly from the 70’s and drive a 2001 Jetta turned out to have hundreds of thousands of dollars in their IRA accounts!
As a rule of thumb, just talk to EVERYONE you know or come in contact with. Practice your elevator pitch, mention it frequently, ask everyone for an introduction and follow up diligently. Soon, you’ll get one or two people who are interested in investing with you, which will boost your confidence. Keep it up and you’ll be amazed by how much money you can raise to invest in apartment buildings!
What do you think about this? Do you think it’ll work? If you’ve tried it, what was the outcome?
Which type of Reg D offering are you using? Hopefully it’s one that permits general solicitation-
Yes, Michael, I’d love it if you could write a future post on the different Reg D options. It’s a bit confusing if you are just dealing with family and friends, and introductions to their family and friends, whether a Reg D is necessary or not.
I wrote a Bigger Pockets article on this topic, check out “Avoiding Prison When Syndicating Real Estate Deals (Do YOU Know the Securities Laws?)” here: http://www.biggerpockets.com/renewsblog/2014/01/27/securities-laws-syndicating-real-estate/.
Thanks!
OK, according to the BP post you referred to use an experienced attorney, etc. etc. But when you say: “you should simply talk to everybody about your ambitions to invest” you’re advising what is considered under Reg D to be “general solicitation”. My question specifically is which type of Reg D offering do you use that allows general solicitation? I’m sure Sharon and I aren’t the only readers who want to learn how you are putting these deals together.
Under Reg D Rule 505 “General solicitation or advertising to sell the securities is not allowed”. My understanding from my attorney is that talking to others about your ambitions to invest is not soliciting people or advertising but rather you are building relationships with new people. This is why it’s critical to have prior relationships with people by the time you have a deal under contract. I’m not exactly sure how “prior relationship” is defined but I think it was something like two prior (and documented) contacts with a person before you ask them to invest in a specific deal. Again, details like these are best reserved for your attorney, but that is my understanding in general and probably good practice: build relationships way before you’re going to take someone’s money.
Thanks Michael, this is very helpful. Obviously a discussion with an attorney before even considering undertaking syndication is non-negotiable, however you’ve helped me wrap my arms around the Regs a little better now.
Question from a reader: “Hey Michael, just had a question. (1) When presenting the sample deal package to a potential investor, when you get some level of commitment, is this in writing, or just a handshake sort of thing? (2) And when a live deal comes up is the commitment in writing?”
(1) Yes, that’s right, it’s a verbal commitment.
(2) Also correct. At that point, at a minimum, the investors sign the LLC operating agreement. If you’re syndicating to meet SEC regulations, you will also issue a private placement memorandum (which doesn’t have to be signed) and a Subscription Agreement (SA) (which does). The SA confirms the investment amount and that the investor has seen the PPM.
Hope that helps!