How to Approach Family/Friends for Private Money

Question

I understand that it's mostly about the mindset, ie, you want to "present them with an opportunity" vs "ask for money," however I was looking for a little guidance on what to say to initially bring up the opportunity to someone I know.

We constantly have deals coming in, however I'd like to at least have a few people that we have formally presented to that have agreed to lend if the deal is right before putting a property under contract with the intention of using private money to fund the deal.

From what I've read on the topic, a "script" one could use would start something like:

"Hey John, I have an opportunity that you may or may not be interested in, but you might have someone in your circle that may.  Do you have a few seconds? Great, well we present investors with opportunities to partner with us on real estate deals from time-to-time where the returns are much greater than what is normally available with other vehicles, such as CD's, IRA's, or the stock market.  The partnerships are secured by real estate that was purchased at below-market prices to protect the investor.  If you're interested in learning more, let's set a time where we can meet up for 15 minutes or so, so I can explain it in more detail.  Do you have 15 minutes to sit down with me over the next few days where I can explain it to you?"

From there, if they're interested, I meet with them and go through my powerpoint presentation and explain how the lending opportunity would go, and explain how they'd get their returns and how they're investment would be secured, and so forth.

If they're interested, in that meeting, I'd give them a copy of our business plan, and get an idea of the type of deals they'd like for me to notify them about in the future.  If they're unsure, I'd get their permission to "keep in touch" with them about how things are going, in the event that their level of interest changes in the future.

I know there's no "cookie-cutter" way to start the conversation, but I'm the type of person that likes to have a little structure behind what we do.

Am I thinking the right way on this, or not?  Please give me your thoughts.

Thanks for your time.

Ryan R. · Answer

Forget the script. Trust me, scripts suck; not just the above script but all scripts. The only effective script is the one that is no longer needed.

I've done exactly what you are trying to do. If you can succeed at it, you'll have more private money available than you have the time to invest it. There is a lot of money available and there are a lot of people looking to invest in real estate right now. So how do you capture them?

You don't. You let them capture you. People hate to be sold something; but they love to buy. Where there's smoke, there's eventually fire. You need to start sending out smoke signals to these potential investors. Not with scripts and sales pitches, but with results; however small they may be. Ask them where they are putting their money. Ask them what type of returns they are getting. Ask them their opinions about RE investing. Be honest, be upfront, be real. Have an honest and open discussion with them about what you are trying to do.

Ask them to meet with you because you respect and want their advice on your real estate investing. When they believe in you and the investments you are making, you won't have a problem finding private money.

Luanne Dvorak · Answer

Taylor,

So are you saying that a private lender  lends the money for a certain length of time and an investor can use if for more than one deal? Is the money held in an LLC? I have heard of someone doing that. Or am I not understanding what you just wrote.

Luanne

Teresia M. · Answer

Has anyone tried this substitution of collateral? 'd like to know how that works.

Taylor Shields · Answer

Luanne,

Yes essentially that is what it is. For practicality sake I'll give a quick example,  lets just say you get an owner finance deal at 2% interest only for the first 5 years on 100,000. Lets also say that the private money guy really likes his cash flow from that and doesn't really want to be cashed out. If you had a substitution of collateral clause in your contract when the agreement was made, you can transfer that loan to another property (with the the approval of the lending partner) keeping the financing in place. As long as the financing is in place and the lending partner likes it, I think you can transfer it as many times as you like.

I have not personally done this so I don't know about the LLC, this is about the extent of my understanding at this point.  I have several colleges that are doing this quite successfully and It's really been interesting me lately.

Taylor Shields · Answer

There's a lot of good advice on this thread. I never approach family or friends with business opportunity's. I'd say the best approach is not to approach at all but to simply get others excited about what you are doing without presenting an opportunity to them at all. Get them asking questions and then say something like, "If you know anyone who may be looking to get involved let me know". If they are interested they most certainly will let you know. If you are dealing with a business relationship things can be a little more forward of course.

A great way to get cheap private money is using seller financing with a substitution of collateral clause so you can move the financing that is in place from deal to deal. There are several investors doing this very successfully in my area.

Also, I'm sure that you have heard of a "Credibility Kit". I would put together a nice leather portfolio with your resume, credit report, several deal case study's showing details of the transactions and what they could have made had they funded the deal, testimonials of any other lenders you have worked with, as well as home owners. You could also insert some content about cash flow, risk...ect

Bob E. · Answer

Another approach that you might consider along with the above is to put together a results package as in investor presentation.

Take a deal you have done and write it up fully.  Then ask some of your potential investors to review your write up because you respect their opinion.  If they like why they see they will ask how they can get involved, if not hopefully you can have a discussion about what you can improve in your presentation.

If you have not done a deal yet then write up what one would look like and present that.  If you are talking to serious money they will let you know if your package makes the grade or not.

Account Closed · Answer

Investors love to hear how their money is protected if something goes south. Lay everything on the table and be honest with investors, and they will invest if you have a good deal.

Joe Gore

Matt B. · Answer

There are countless ways to arrange something. It just comes down to what both parties agree to.

If there are just two parties involved the simplest ways would involve either a joint venture agreement or a promissory note arrangement. With the j/v agreement it would essentially be a partnership, where the friend supplies the funds and you supply everything else. You each then get a percentage of the sale. With a note, the friend is essentially loaning you the money for whatever terms you agree to(usually a fixed interest rate) and you agree to pay it back. The note can either be secured by the property or unsecured.

Either way you want a decent real estate attorney to draft the agreement. If you want to get more creative than you will probably need a securities attorney.

Much success.

Tom La Rosa · Answer

Great thread. Im pretty new here.

@Matt Buckels ,@Ryan R. ,@Alvin Grier ,@Travis Dagget

I have a friend and a family member that have vaguely expressed interest in investing with me. Its a great concept, but I have no idea about structuring a contract, percentages, making everyone feel safe.

How is it done ? On a flip. I will find the house and do the renovations.

My partner would be basically supplying money.

Matt B. · Answer

It takes a while to develop the right relationship with potential investors. Especially one that centers around a high amount of trust. We all seem to want investors to turn over their cash to us after one simple pitch, myself included.

The reality is it usually takes several hits to get someone to invest with you, even friends and family. Aunt Edna may have a hard time investing in you if all she remembers is the little kid dressed in the superman cape when you were 10. Their perception needs to be that you are the go to person when it comes to investing.

I personally believe it helps to present yourself like a financial advisor would, as opposed to a real estate investor. We take the approach of creating "investment funds or opportunities" as opposed to using private lenders. I don't like the idea of borrowing from someone, that gives a weaker perception, as in servant to the lender. Not the approach for everyone, but works well for us.

Be patient, but persistent. Keep people continually informed of what you are doing without being salesy. Much success.

How to Approach Family/Friends for Private Money

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