Rule #3 When Raising Private Money: Get More Than You Need

When you are raising private money to buy real estate, you typically have a target number in mind for how much you need from investors. By performing a project budget and financial projections, you determine the right number. Perhaps you need $100,000 to buy and rehab a foreclosure house. Maybe you need $2,500,000 to buy a commercial building. Whatever number you think you need, write it down on paper.

Now DOUBLE IT.

That's right.

DOUBLE IT.

There's an old rule of thumb when it comes to raising capital:

always ask for more money than you need.

This is for two reasons:

1. Your numbers may not be 100% accurate

Surprise! Yes, this does indeed happen sometimes. You plot and plan as carefully as you can, but you still somehow come up short. That city inspector that gave you a list a mile long when you thought it was only going to be a short one. The cost over-run on the rehab. Taxes went up on the property. It took longer to sell the property than you originally thought.

Don't worry.

This is part of business. There's no such thing as a perfect budget or financial projection. But, you can cover yourself in a major way by having more than enough capital on hand to deal with all issues successfully.

2. You may not get the entire amount you ask for

Surprise again. Although you may be seeking to raise $5,000,000 in your private money offering, you may not get the full amount in the time frame in which you need it. Certain factors outside of your control could affect this, such as the time table being moved up for the property closing. Sometimes an investor will back out of the deal (maybe junior spent all his college money). You just never know. So, you play it safe and aim to raise $5,000,000 instead of $2,500,000.

But Adam, isn't this going to cost me money?!

You bet it will. Having more private money than you are allocating to financially performing projects will most certainly cost you a little bit of money. You'll be paying returns on that extra money. But, let me address this further by giving you a third reason to raise more private money than you need:

it's  easier to ask for more money in the beginning than it is to go back with your hat in your hand and ask for more later.

One way makes you look intelligent and pro-active and the other way makes you look unprofessional (at best) and foolish (at worst). Neither one is a good face to put forth to your private investors.

There have been times in my business where I've sat on 'extra' private investor money for months and months because projects took longer to complete or the timing was delayed on a sale. Hey, this is life: things happen. Better to be prepared than to get caught with your pants down. I don't want to go back to my investors and tell them that my company only achieved a 6% or 7% return on a project because we were capital starved. The investor might look at me and ask me why I didn't just get more money up front. I don't want to face that situation.

What this really boils down to is being pro-active. If you've ever read The Seven Habits of Highly Effective People by Stephen Covey, which is a timeless business success book classic, you'll note that being proactive is Habit #1. This is for a reason. When you're proactive in all aspects of your business - particularly with raising capital - your odds of success increase exponentially.