How to Not Blow Up a Private Money Deal

When you are raising capital for a real estate investment project, it's easy to get caught up on what you should do in order to secure the money. If you focus on core principles and take action, you're half-way to the goal line. However, I have found it at least as (if not more) helpful to know some things that absolutely should not be done when raising private money. If you were walking through a field at night, knowing where the rocks and logs and pot holes are can save you some headache and frustration.

Here's a quick map for you:

No Disclosures- If you don't have the right legal and securities paperwork taken care of so that you can present to your investors at the right time, you are jeopardizing your money raising. Not only is this important from a legal/regulatory standpoint, but you must always keep your investors best interest in mind - this is the path to raising big capital. Present your private investors with the proper disclosure documents (questionnaire, PPM,etc) and you will at least have the bases covered.

Lack of Coherent Plan - bringing private money into your business with no way to 

allocate the funds intelligently is a recipe for failure. It's one thing to raise the capital and be patient for the right deals - but you have to pull the trigger. There are real estate investor who will raise money and then stare at the lovely cash balance in their accounts. Bad idea. Cash costs you money if  it sits on your books for too long.

Back when I was in college, an economics professor of mine would say: "CFO's get fired for being in cash." What he meant was the financial officers job was to allocate money and put it to efficient uses that would result in high return projects for his company, not sit on huge cash balances in the company coffers. In finance, there is also a concept called 'Cost of Capital'. The cost of capital for a company, such as yours, is the rate of return required by lenders and owners (e.g. shareholders, LLC members) to keep money in the company. Companies that don't earn at least their cost of capital are eventually put to pasture - the investors want their money back. Similarly, if you bring private money into your business and you can't put it to good uses, you investors will want their money back. Eliminate this completely by having a solid business plan before you raise money and commit to executing that plan.

No Team - If you don't have a team of competent professional advisors working with you side-by-side, you're cutting yourself off from potentially millions of dollars in capital you could be raising and using. Retaining a good real estate attorney, securities lawyer and CPA are mandatory when you get serious about raising a lot of private money. I encourage you not to be penny-wise and pound foolish. If you arm yourself with knowledge ahead of time, you should have VERY reasonable billable hours with your advisors - it shouldn't be that expensive at all. You can use your own legal forms if your attorney will modify them for a lower cost and also direct them how to handle your needs. When you have no idea what you are doing going in, your advisors will have a harder time helping you. Getting a knowledge base and continuing to learn will help you have a better relationship with your advisors.

These are three sure-fire ways to blow up your private money deal. Transgress and you'll either short-change your offering or be facing investor redemptions and get caught in a tailspin. Why go through the time and effort to get so close to your goal and get tripped up at the 2 yard line? As Warren Buffett has been quoted: "the first rule in making money is to not lose money." Similarly, the first rule in getting private money is to first not blow up the deal.