Here's a Quick Private Money-Getting Tip

Hot off the presses...a conversation I had with a prospective private money investor yesterday.  Because I thought this could be pretty instructional, I wrote everything down right after I hung up the phone.

Here's the "meat and potatoes" of the conversation:

Prospective investor (PI): "I'm a bit worried about the stock market, it's gone down a lot in the past few weeks and I'm thinking of taking some money off the table there."

Me: "I hear you...it's hard to understand what makes the market fluctuate so much, especially the extreme up and downs. Are you more focused on preservation of wealth now versus accumulating?"

PI: "You could say that. I've got enough to be comfortable on, but I've always focused on increasing my means. Your information says that you can get my money out for respectable returns. I think I'd like to give it a try, but I don't know if I want to tie my money up for very long."

Me: "Yes, we can definitely place your funds into a real estate investment that you'd be very comfortable with - something that would give you some stability in your portfolio. Now, as far as the time frame for investment, can you tell me what you have in mind?"

PI: "I'm just worried that the market may start shooting back up. If I pull funds out to invest with you, then I might miss out on a big rally."

Me: "I understand."

PI: "The last time I pulled a bunch of money out of the market, it went right back up two months later."

Me. "It's hard to predict and time it right all the time."

PI: "Yes, they say you can't time the market, but it sure seems like people do get it right and then you're left out of the bull run."

Me: "You're right. I've seen it work out for some people quite nicely. On the other hand, I've seen it go sideways, too."

PI: "I suppose...that's true. Nobody's got a crystal ball."

Me. "Mr. Investor - why don't we start with one of our short-term higher yields...where you can invest with us and receive an annualized yield of 11% but you will have the option to re-invest and roll-forward  every 4 months?

PI: "Ok....how would something like that work?"

Me: "It's pretty simple, really. We like to keep things as simple as possible."

PI: "Simple is good."

Me: "I agree. Now, if everything makes sense to you, is it fair to say that you're comfortable with the minimum required investment of $100,000?"

PI: "The money is not the issue at all. I can call my broker tomorrow...or even today. I need to talk to him anyway."

Me. "That would be fine. Here's how the investment would work: you would place funds with us in a private placement. As you've seen in the literature...

--End conversation snippet--

I went on to explain how the investor could place funds with my company for our short-term flip deals. Wherein, they would be a secured mortgage lender. They would receive a promissory note which would pay monthly interest for 4 months. At the end of 4 months, the property will be sold and their principal amount returned. At that time, they would have the option to re-invest and place their funds in another deal. This is how it was structured as a "short-term yield."

If you are paying close attention, you can see that there are some very important pieces to the puzzle that I put together here:

1. I accommodated the investor - but kept it win/win. My marketing pieces tell investors that I have a 3-5 year time horizon for placing funds. This helps shake off a lot of people who really don't have the means to invest. If the investor expresses a strong desire to place funds, I will everything I can to make it work. Why? Because I want to get them invested. Once they place funds, I will dedicate significant time to showing them how crazy it would be for them to invest anywhere else. More on this in a minute.
2. I qualified the investor - re-confirmed they have minimum funds to invest and they those funds were relatively liquid and ready to go
3. I did not "negative sell" or downplay their investment philosophy. Even though I don't agree with trying to time the stock market, etc. I did not say anything to throw salt in the wound or rub in how great my investment was compared to the alternatives. This fits nicely with my model of presenting private money as a nice menu choice for investors instead of browbeating them and telling them they should eat at the new exotic restaurant in town. It's easier to tell them they should try the lobster instead of the hamburger on the same menu where they like to eat.

More about #1 (above): I really want to get the investor committed and used to the idea of having their funds placed with me. After the closing, I go way above and beyond what any reasonable (or unreasonable) person would expect in terms of the proper care and feeding of investors. They will feel like they're being treated like royalty and I will then turn on the referral and supplemental money machine (more money from existing investors as well as referrals from those investors).

Some of you might wonder how this applies if your business model is buy & hold for SFH or commercial. Honestly, I think you can apply it just the same, albeit with a slight twist.

In the case of an apartment building, you can simply tell the investor that, if they commit the required funds, that you will allow them a special liquidation preference in a certain period of time. This puts a little more pressure on you to replace those investors funds if they want to redeem, but it's still possible.

For longer term projects, the "short-term" approach won't work as well. You can, however, still use the qualifying mechanisms and "non-negative sell" techniques to great success. If you have a longer term project and the investor meets my qualifying criteria as: "ready, willing, able" then try the following:

• counter with smaller investment minimum
• counter with preferential tax treatment for distributions (capital gains as opposed to profits in the partnership distributions for an equity partnership - LLC or LP)
• offer escalating returns commensurate with time invested (e.g. 10% for up to 12 months, 12% for up to 18 months, 15% for up to 24 months) - if your project can support it. This is how many hedge fund structures are set up, except the incentives usually flow to the managers versus the investors

RRRRRRRRRRRRRIIIIIIIIINNNNNNNNNGGGGGGGGG!

There's the bell...class dismissed for today. Please go forth and continue kicking butt.

-Happy Investing