Private Money - where to begin

[Roy N.]

After months ... well, maybe a year, of lurking, I've submitted my "introduction" post and made a few other small contributions to some of the fora.

Now I've sat down to raise the questions responsible for my being here in the first place and I'm not exactly certain how to start ... so, rather than try to write eloquently, like any engineer, I'll resort to a bullet list of the facts ;-)

1) As alluded in my introductory post (http://www.biggerpockets.com/forums/55/topics/88317-new-sort-of-in-canada ) I realise we have arrived at the point where, if we are to grow our real estate business to meet our objectives in a reasonable time period we need to start using other peoples money (OPM) to purchase properties.

2) I've helped raise both private and public funds for startups in my past, so the principal and general process is not foreign to me.

3) Despite the above two facts, I am presently seeing the task of approaching people for private financing as a "necessary evil" and am loath to do it. I also know, I need to straighten this out in my head before I begin looking for financiers or I'll be unsuccessful at convincing anyone.

4) I've been {over}analyising this trepidation and I know it is due in-part to the fact I am uncomfortable "selling" - but this is not new and I have always been able to overcome it in the past and was actually very good at pitching.

5) In the past I was operating in my engineering domain (specialized area) and I was extremely confident my depth of knowledge exceeded that of the investors and fund managers to whom I was presenting.

6) The difference this time around is I'll be pitching/selling a far more general idea (a rental property) to an audience whose experience in the domain may likely exceed my own. So it boils down to confidence in my analysis and domain knowledge.

7) Rationally, math is math and unless I made a horrible mistake in one or more assumptions, the numbers do not lie.

8) In my current analysis/screening of properties/deals I am looking for
a) positive cashflow;
b) operating expense ratio <50%;
c) debt coverage >=1.5;
d) PE <3;
e) Cash-on-Cash of 10-12+;
f) BER <=75 (80 at the max)
g) I tend not to be driven terribly by the CAP rate if the cash-on-cash is good - in the local market it is extremely rare to find a multi-unit with a CAP >7.5 to 9

In our analysis we use an opportunity cost of 8%; a maintenance & CAPX set aside of 10%; and assume a vacancy rate of 8.33% (1 month in 12) ... we try to be conservative

9) I do realise that while the above ratios have been fine for us, they may not be sufficient for a potential private money financier. However, I would think so long as we can demonstrate the cash-flow can service their note and provide sufficient reserve, as a debt financier they woud be satisfied.

What I am looking for at this point is

a) a general indication of whether we are rowing in the right direction;
b) tips on how to package/present an offer to a financier ... in engineering it is analytical and easy, my experience thus far in real-estate (with Sellers and conventional mortgagees) is there is a far higher degree of subjectivity in decision making.
c) Any indication on what we may need to change in qualifying our properties prior to striking a deal ... i.e. do any of our conditions need to be tightened?

Any and all feedback is welcomed ... after digesting it, I should be able to focus future questions a little better.

[Bill Gulley]

Roy, Ned, Jeff and Jon are right on target with the right attitude!

I wrote about this several times in the past how to appraoch deep pockets. Acyually I need to credit my approach to a guy named Tommy Turnage, an insurance sales manager who retired as a disctrict manager of one of the largest insurnace companies. He said make them beg for the policy. The reason is to motivate an insurance client into understanding the importance of any plan so that they keep the policy(ies) as a lapsed policy goes against the earnings of the agent as well as management. Make them acknowledge they want the policy three times before you have them sign an application!

A loan and an insurance policy have something in common, they are both financial products. The motivations of a buyer of a financial product are similar, some of it boils down to greed and either making more money or saving more money than the cost as with insurance in estate palnning. The product, money, then becomes an opportunity to provide a benefit over time, so you need to market it as such.

I've had many people say, "well, yes, I guess I'd be interested in getting 10% on my CD money" and my response was something like "well, okay, we'll talk about it sometime if you're interested", most RE types would jump on that and go into thier pitch. Not me.

I don't want investors who wade in knee deep looking for sharks. These people get cold feet quickly, they worry, they call to see how things are going, they want to know how the construction is going, they drive by the project (not even knowing what they are looking at) and they will call about things until the payoff transaction is closed. That kind of money is a real PITA and carries a much higher cost than the note rate!

These knee waders are also the ones who, if they need thier money for any reason, like to send thier grandkids to college, they will ask if there is anyway to get thier money out. If not, they then complain to family they can't get thier money out. What comes next? Thier family starts to call asking why mom can't have her money....and who are you? A RE guy? First thing that pops in thier mind is that you're some crook that talked mom into investing in some RE deal! Guess what happens next.... right, thier attorney calls and wants to see all the documents and wants to crawl up your tail looking for any reason to do whatever to get his client's money out of you.

What I wanted were investors who dropped off a check and walked out, rarely called me, slept well and had big smiles when I gave them thier return. To get those people you need to do some key things:

1. Instill interest to the point that beg to get involved.
a. This means making your success known as well as that of investors doing business with you....WITHOUT giving names.
b. Letting them know you are the expert, that you know the risks and how to manage the risks to protect your investors, putting them first ahead of you.
c. Education, teach them how the money flows, how it's protected through the process and how they get thier money back.
d. What the deal is, the documents used and why. The terms of not just your deal but any other transaction that may follow being the underlying source of funds for you and them.
2. Now, make them beg! You can see the motivation investors have, only when they are ready to dive in are they ready to invest in RE.
a. Older investors, often just have concerns of making a decission. Use a third party as a center of influence, get family involved. It is a risk of getting shot down, but the other side is getting even more money made available and that is usually the case.
b. More sophisticated investors may sound more decisive, but make them go through the same details. Some say they understand how it works, you need to explain how it works with you.
3. Do the deal, outline at what points you will be communicating with them and keep them informed. How often you keepthem in the loop depends on the deal, a quick flip or a three year term sets the stage.
4. Contact them for other deals as they come, you're giving them more opportunities, not begging for money, they will appreciate the call so long as you don't pressure them, if they have more to invest you're there, if not, wish them well.
5. Get referrals, ask if they are pleased with you and the deals you have done, if so, then, who do you know who could benefit from similar opportunities. Ensure them you won't run out of opportunities for them but there is certainly room for others who can understand the investments. For some who just love you, ask if you can give them as a referrence, but only if you need to with a select few. (They don't want thier phone ringing all day).
6. Do what you said you will do! It's very important to touch on key areas in exactly the same way you do with all investors. What you say to one is what you say to all! It makes doing what you say you would much easier.

Good luck! :)