Private Investor Targeting - Are CD's Your Best Shot?

There's a school of thought among some in the real estate investing community that a certain target market of potential private investors is so lush and fertile that you should spend most of your time marketing your opportunity to them. The same school of thought goes on to emphasize that this same target market can provide you all the private money you need and in short order. Who am I talking about? Who is this potentially untapped pool of private investor dollars?

CD (certificate of deposit) owners.

But, should you spend a great deal of time marketing your real estate investment opportunity to owners of CD's?

First, let's look at the nature of a CD. A CD is an FDIC insured bank time deposit. This is one of the ways a bank borrows money. The bank takes the money in and pays an interest rate for a set period of time. The bank then loans that money out at a higher interest rate than they pay the CD holder and - voila - banking 101.

By their very nature, Bank CD's are zero risk (FDIC insured up to $250,000 now) and carry lower interest rates compared to other fixed income investments (government bonds, municipal bonds, annuities). There's also a little stipulation that comes with opening up a CD which says that you'll pay a penalty if you take the money out before the CD matures.

Some of the clues are starting to unfold, but let's dig deeper...

CD owners, by their nature, are going to fall into two primary classes:

1. those that have the majority of their liquid capital in CDs (seniors)
   
2. those that own CD's as a small allocation of their overall investment portfolio

Most of the people that have a boatload of money stacked away in CDs are in the highly risk averse senior demographic. Quite rare is the case where a 45 year old husband and father of 2 has $100,000 tucked away in a CD. The seniors (age 65+) have worked and saved and pinched pennies throughout most of their lives to build their cash horde. They like CD's because they get at least some interest and they don't have to think about it at all. It's pretty easy for a banker to talk a 74 year old lady with $200,000 liquid into throwing a pile of that money in a 2 year CD. What's nice about CDs for senior investors is that they are highly predictable and lend themselves well to estate planning.

The second category of CD owners have some of their money there as a portfolio allocation. It is part of their asset balancing or the preferred place to keep their rainy-day reserve money.CD's are a small piece of their investments - they have stocks, mutual funds, bonds and perhaps some real estate holdings in addition to owning their primary residence.

Now, taking what we just discussed into consideration, are CD owners a good shot for marketing your opportunity to?

Let's see if they fit the profile of "able, willing and ready" - my litmus test for proper investor targeting.

Able - are CD owners able to invest funds with you? Most likely 'yes' they are. This test is passed because we're assuming that there is at least $100,000 in a CD.

Willing - is the CD owner willing to invest? While it's tough to say without talking to them one-on-one, the evidence (and my experience) has shown willingness to be low for the senior demographic. Why move from a safe, federally insured investment into something that they have never heard of before? If they won't invest in stocks or mutual funds, then a private placement in real estate is going to be tough to explain. Even a mortgage investment with you isn't as easy for them to comprehend. A good rule of thumb is: if your investors cannot explain back to you in simple terms what they are investing in, it is better to pass on their investment dollars. You don't want to deal with redemptions 1 or two years down the line. Family members also play a role here as well as SEC regulations (more on that later).

The other part of 'willing' that is going to blow it for the CD owner is their time frame. You should not be eager to take money from people for your real estate investments unless they are comfortable committing funds for at least a 3-5 year term. Why? What if your project is going to cash out in 6 months? Simple: it's the principle of it. If the investor is not fiscally sound enough to commit funds to you for the 3-5 year time frame, then other factors could arise and impede their investment with you. Your best investor can commit funds and will be happy with the returns building for a while.

The other big reason is that you want to use the investors funds for a while - even if the first project cashes out after 6 months, you want to keep rolling those funds forward and using them again and again to create wealth for yourself and the investor. Why spend all the time and effort up front to win the investor just to never see them again after 6 months or a year? Your goal should be to have long term funding relationships and to leverage referrals and word of mouth from your investor base so that you get more and more private money.

I'm going to say that the "willing" test has not been passed. Let's move on to the third test...

Ready - is the CD owner ready to invest with you? Since they've got their money tied up for a specified time, my guess is 'no'. The CD owner would have to at least wait until the CD matured to place funds with you. Perhaps you could get away with covering their penalty or if they had a CD maturing soon, in which case they may be ready. Generally, though, CD funds are either stashed away to be in the 'low risk' part of the investors psyche or the low risk part of their portfolio. You won't have much success tapping into 'rainy day money' or 'junior's college fund' money. The investor already has these funds earmarked to be in a low risk and predictable investment. Trying to change their mind isn't a good idea. In fact, it's never a good idea to try to change someone's mind when marketing anything. The question shouldn't be: "should I invest?" The question should be: "should I invest with you?" Big difference.

Ready test is not met.

Here are the results of the: "Able, Willing and Ready" test:

Able - Pass

Willing - Fail

Ready - Fail

1 out of 3 really isn't going to cut it. Seems like the conventional wisdom has been turned on it's head once again.

I know I'm begging the question: "who should you target as a private investor?"This is a big answer, but the short version is: already invested funds. The best source of private money for you is going to come from people that already have money invested in vehicles like: stocks, bonds, mutual funds, annuities, 401(k)s and others. For the private investor, it's a much easier position to 're-allocate' their portfolio than it is to re-think their investment approach. CD owners are not going to be your #1 target.

Smart targeting + Smart time allocation = Private Money.