How to approach private lender

Question

I have connections with businessmen from NYC “whom are always looking to invest” (private money lenders). Does anyone have any ideas on how a rookie investor should approach them? Does anyone have any good deals that need to be funded? I’m looking to try out the BRRRR method to get my foot into the door of owning real estate. Positive advice and help is appreciated. Thank you in advanced BiggerPockets family.

Barb F. · Answer

I'm looking for funding as I search for deals in the vicinity of Huntsville, AL! I arrived here yesterday from VA. I'm pretty happy with the property manager I met with this morning, and she's also a realtor, so that's two puzzle pieces down. It's now a matter of finding a property and then funding it.

What I'm doing in looking for a potential partnership is getting my hands dirty. I drove my backside all the way from northern VA down here so I could get the lay of the land, understand the market, and meet with a few folks while I'm down here. Yes I am starting from the ground up, but I believe that doing this type of work shows one is serious and that they're willing to commit to the sweat equity that will be needed later on, too.

I'm also talking about my current desires and steps toward them with friends and family. It coincidentally happened that the boyfriend of the friend I'm staying with is interested in real estate investing too! He did research a few years ago but never got started. He was impressed by my organization and commitment, and said if he had more cash right now he would be open to partnering with me.

This is just my two cents and way of looking at things. I'm willing to do some hustle to lay the ground work, but I just don't have the money to fund something alone yet.

For what it's worth, I'm also in a Toastmaster's club. I'm typically an introvert who doesn't like putting myself in the spotlight, but I've had an opportunity to practice speaking. My sharing openly and honestly about who I am, my club members have come to appreciate the vulnerability I share and it develops a sense of trust and intimacy in a relationship. These are relationships I can network, because folks know I'm trustworthy and will tell it like it is. Finding ways to demonstrate your trustworthiness and commitment will likely aid your credibility as you approach folks.

Good luck!

Nick Schoch · Answer

Ultimately, your question is how do you sell them an investment. Generally speaking, investors are focused are focused on risk-adjusted return on invested capital.

What this means to most people in your position is putting together a prospectus or memo that summarizes the investment. The prospectus should speak to the opportunity and expected upside while addressing key risks that could jeopardize the "return on" as well as the "return of" capital.

Most real estate investors will know how to "size" a deal and analyze a deal on their own, especially relatively similar investments like real estate. Nonetheless, your presentation should convey the necessary information for them to do that analysis by providing historical performance, expected future performance, and your proforma assumptions.

Here is an example for a RealtyShares deal (investment completed over a year ago).

Brian Metz · Answer

Hi Arturo,

Read Matt Faircloth's book Raising Private Capital. I recommend getting some experience first if you can. Like @Bill Plymouth said, try to team up with someone that does have some experience in your area to build street cred too. Well put Bill!

Best of luck!

Cheers,

Brian

Nate Marshall · Answer

First you should have a business plan. If you have a previous relationship with them you're good.

You should also have a good presentation. Be open to having to give them a bit more equity or interest in the properties. Keep in mind you are still selling a security. A partnership is a security.

If you're looking to raise more capital look at doing an SEC compliant 506(C) with a Private Placement Memorandum and Form D as well as a full investor portal including flipbook for your presentation.

Alina Trigub · Answer

@Arturo Andres Lara

You need to start off by asking your businessmen friends from NYC:

1) what are the pain points they are trying to satisfy. In other words, what type of investments are they looking for: deft, equity, both?

2) are they open to LT or ST only?

3) will they consider working with you if you bring them such a deal?

4) what are their return expectations.

You don't need to take all these answers to the T, but it will help you paint the appropriate picture. Once you have this picture painted, you can start looking for experienced operators offering such deals. You can also learn how to do such yourself but it will take some time to get educated and gain experience (btw you should still educate yourself while partnering up with others.)

Theo Hicks · Answer

Have you completed any deals before? If not, you are going to have difficult raising capital from people who aren't either family or friends.

If your plan is to BRRRR, I would either use your own funds or raise capital from family and friends. Once you have proof of concept, you can present a business plan with personal case studies to these businessmen.

Another option is to find a partner who has the track record that you can leverage. However, similar to raise capital, you need to bring something to the table in order to convince them to partner up with you.

Creating a thought leadership platform where you interview experience apartment professionals can help increase your credibility in the eyes of prospective investors too.

Shaun J. · Answer

I am from NY too @Arturo Andres Lara. I hope your fat pocket guy doesn't have the first name of Jimmy. I know him and he owns a good portion of Manhattan -- He will eat you alive!

To answer your question; Don't be shy about your inexperience. Have your numbers tight, and make sure they understand that there is a possibility they can lose money. Real investors understand the risk and this is why they don't pump their money nto the stock market as much as they used to. REI is a "safer" bet in their eyes with quicker and larger returns.

I have a few big pocket guys out on Long Island. Reach out if you need to or want to JV a few deals. If the numbers make sense for all involved, I can steer my guys in the right direction.

Kent Leach · Answer

The best way to approach a private lender is to have either a real deal or a sample deal to show them with numbers calculated.  You should know what these minimum numbers are for you.  Keep networking on here and always bring value.  There are deals out there.  We underwrite over 100 multifamily deals a month in dozens of markets, just to get one to offer on.  If you partner with an operator that can go anywhere and turn an asset  into the most desired apartment complex in the market, you don't have to limit yourself  to  one or two markets.

Bill Plymouth · Answer

I'm going to start off by saying that I have yet to use private money in my career.

If I were to approach a PM lender I would have all of my ducks in a row.  Show them why you invest where you do, how you will protect their investment, and how they will get paid back.  Also, have documents prepared hat explains in any investment a loss of capital is possible.  Something along the lines of "Do your own due diligence.  It is possible to lose money".

Show them any other deals you have done before.  If you haven't done any deals before team up with a more experienced partner and show the investors their deals.  That way they know someone experienced is protecting their money.

If a deal goes south, make sure your investors get paid back first.  Worst case scenario is you lose out, but they will lend to you again because they know you will protect their investment.

How to approach private lender

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