In a prior blog post, the case was laid out for finding a deal before capital. In this blog post, I make the argument for finding the capital before the deal.
When it comes to finding a deal, what do you really have if you find a deal but do not have the capital to acquire it? It is practically the same as not having a deal at all. This is the same as going to Best Buy and finding the elusive PS5. When you go checkout, you don’t have enough or any money to pay for it.
While it is true there is capital sitting on the sidelines waiting for the next deal. The question will be how long will it take for you to raise the capital? Do you know enough investors or can you meet enough investors to raise the capital needed in time to close on your deal? Even if you meet enough people who give you a soft (verbal) commitment, can you get enough of them to the closing table and have them sign the necessary paperwork and wire the funds to you in time?
In general, of all the capital you are able to raise, you should expect only about 30%-50% of soft commits to actually end up funding your deal. This means you will actually need to double the amount of committed investors in your pool to get the capital needed to fund your deal. Can you get in front of enough of these investors?
This is the reason capital raising must happen long before you start looking for deals and getting properties under contract. Most of the time, you will only have 45-60 days to close on a property once it goes under contract. Therefore, it is extremely important to be out there meeting with your current and potential investors to develop and maintain your relationships with them. When raising capital from investors, this is not just a one-and-done deal. You must create a consistent and beneficial relationship with these investors. For many, it may take time to educate and help the investor see the benefits of investing in real estate and with you. If your investment deal is using a syndication model, you’ll need to keep in mind whether it is a 506(b) or 506(c). There are very strict rules governed by the SEC on who and how capital is raised. You can read more about it here.
Even with being consistent, substantive, and mutually beneficial, your investors still may not commit to invest with you. Circumstances in life can turn a ready investor to the sidelines. With consistent communication with them, you will hopefully know who is and is not ready to invest in your opportunity when you have one.
In short, raising capital along with finding the deals is one of the most important tasks in the business. Without capital, you don’t have a deal. Don’t hesitate to talk to anyone and everyone about what you are doing. When you find a potential investor, you must maintain consistent, substantive, and mutually beneficial contact with them. Remember, there is no “I” in team and a team is what it takes to successfully take down a deal.