RAISING PRIVATE CAPITAL This publication is protected under the U. Copyright Act of 1976 and all other applicable international, federal, state, and local laws, and all rights are reserved, including resale rights: You are not allowed to reproduce, transmit, or sell this book in part or in full without the written permission of the publisher. Limit of Liability: Please note that much of this publication is based on personal experience and anecdotal evidence. Although the author and publisher have made every reasonable attempt to achieve complete accuracy of the content in this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.
Your particular circumstances may not be suited to the examples illustrated in this book; in fact, they likely will not be. You should use the information in this book at your own risk. Nothing in this book is intended to replace common sense or legal, accounting, or professional advice, and it is meant only to inform. Any trademarks, service marks, product names, and named features are assumed to be the property of their respective owners and are used only for reference.
No endorsement is implied when we use one of these terms. Raising Private Capital Matt Faircloth Published by BiggerPockets Publishing LLC, Denver, CO Copyright © 2018 by Matt Faircloth. All Rights Reserved. Publisher’s Cataloging-in-Publication data Names: Faircloth, Matt, author.
Title: Raising private capital : building your real estate empire using other people’s money / by Matt Faircloth. Description: Includes bibliographical references. | Denver, CO : BiggerPockets Pub. Identifiers: ISBN 978-1-947200-98-2 (pbk.) | 978-1-947200-04-3 (ebook) | LCCN 2018938234 Subjects: LCSH Real estate investment.
| Real estate investment--Finance. | BISAC BUSINESS & ECONOMICS / Real Estate / General Classification: LCC HD1375 .6/324--dc23 Published in the United States of America 10 9 8 7 6 5 4 3 2 1 Dedication I dedicate this book to the person I dedicated my life to so many years ago. To my life partner, my best friend, and my love, my wife, Liz. There are just not enough words.
Thank you for all that you are to me and to so many others. TABLE OF CONTENTS FOREWORD | by Joe Fairless, Host of the Best Real Estate Investing Advice Ever Show INTRODUCTION CHAPTER 1 INTRODUCTION TO PRIVATE CAPITAL Unique Factors of Private Capital Introduction to the Deal Provider Introduction to the Cash Provider Private Capital Uses Sources of Private Capital Final Thoughts CHAPTER 2 PREREQUISITES BEFORE YOU START RAISING MONEY Why Can’t I Start Raising Money Now? Prerequisite No. 1 | Get Educated Prerequisite No. 2 | Develop a Track Record Prerequisite No.
3 | Take a Personal Inventory Prerequisite No. 4 | Create a Business Plan CHAPTER 3 THE DEAL PROVIDER Systems | The Key to Success Working from the Inside Out Getting Your Name Known The Deal Provider’s Investment Vehicles Keys to Success CHAPTER 4 THE CASH PROVIDER What Makes a Cash Provider a Good Fit? Why Do They Need You? Cash Source Part I | The Self-Directed IRA Cash Source Part II | Real Estate Equity Cash Source Part III | Cash Final Thoughts on Cash Providers CHAPTER 5 WHERE TO FIND CASH PROVIDERS Introduction to the Cash Provider Pyramid Tier 1 | Core Group Tier 2 | Referrals Tier 3 | Taking It Public Final Thoughts on Where to Find Cash Providers CHAPTER 6 HOW TO TURN POTENTIAL INTO REALITY Fear of Asking for Money Your Personality | The Good, the Bad, and the Ugly The Cash Provider Enrollment Process The Most Common Cash Provider Questions Follow-up | Where Most Deal Providers Fall Off Final Thoughts on Turning Potential into Reality CHAPTER 7 HOW TO STRUCTURE THE PRIVATE LOAN DEAL Deciding on the Terms of the Loan Private Loan Pitfalls Documents for Setting Up a Private Loan The Beginning and the End | Two Days That Matter Most Final Thoughts on Private Loans CHAPTER 8 HOW TO STRUCTURE PRIVATE EQUITY DEALS Revisiting the BRRRR Strategy Reasons That Deal Providers Should Consider Equity Which Cash Providers Are Right for Equity Deals? Equity Investment Vehicles Setting Up the Equity Structure The Operating Agreement Staying in Compliance with the SEC Common Mistakes Made on Equity Deals Final Thoughts on Structuring Equity Deals CHAPTER 9 MANAGEMENT, EXITING, AND BEYOND Investor Relations Plan Exit Strategies Beyond the Deal Final Thoughts Acknowledgments FOREWORD by Joe Fairless, Host of the Best Real Estate Investing Advice Ever Show Remember the scary thing you did that one time? And after you did it, it wasn’t so scary anymore. It was something that took a lot of courage, but darn it, you did it, and thank goodness you did! Maybe it was buying your first property. Maybe it was swimming from the shallow to the deep end.
Or maybe it was finally asking out that good lookin’ guy or gal you’d always had your eye on. We are not human beings. We are human becomings. And I believe life is about how we continue to evolve through our experiences, using these experiences to continue to become a better version of ourselves so we can maximize our time on earth.
Take a moment to think about that scary experience you ultimately faced but worked up your nerve to push through and overcome. After you went through with it, I know for a fact at least these two things happened: 1. It opened up a new world of possibilities for you. You didn’t die.
(Phew!) Whether or not the experience ultimately worked out how you intended is another story, right? Sometimes we take a leap into something and it doesn’t initially work out. But that’s OK as long as we learn and grow from that experience and then apply those lessons to optimize future results. So this raises the question, Why don’t we jump into the deep end more often? If it opens up new possibilities for us, then why not always look for a deeper and deeper pool to do cannonballs in? Well, if we go diving in the deep end of a pool without first knowing how to swim, then that’s going to be an issue. An issue for us and an issue for everyone around us.
Welcome to Raising Private Capital: Building Your Real Estate Empire Using Other People’s Money. This book gives you the tools to learn how to properly raise money so you can grow your real estate empire while helping your passive investors achieve their financial goals. Without this book, raising money would be like doing a cannonball in the middle of the ocean during a tsunami. So first, congrats on your purchase and your commitment to elevating your real estate game.
But buyer, beware: With this book comes some serious responsibility. When you partner with passive investors, you are leveraging not just other people’s money. You are leveraging their time. And time is the most precious resource we have.
It is limited, and we can’t get back what we lose. That is why Matt has put so much emphasis in this book on protecting private money. Capital preservation is the most important part of partnering with passive investors. First, the focus should be on return of capital.
Then on return on capital. I’ve interviewed investors during my podcast who have raised money from family members and lost it on a deal. Brothers and sisters didn’t want to sit next to them at Thanksgiving. Lifelong friendships turned sour.
We must avoid this by actively reading this book and applying its principles. My suggestion to you as you read this game-changing book is to think about the dollars you raise from your passive investors in terms of time spent to acquire those dollars. Think about the time, effort, and sacrifices your passive investors undertook to earn that money that they are now going to trust you with in your deal. When we think about it in terms of time, not just money, it creates a clear picture of how important it is that we partner with investors only after we thoroughly understand how to protect their dollars.
After mastering that understanding and successfully partnering with passive investors, it’s highly likely your real estate business will reach heights ten times faster than what you previously thought. I’ve seen this happen with my own company, Ashcroft Capital, and I’ve seen it happen with Matt’s, the DeRosa Group. Matt and his wife, Liz, started with a $30,000 loan in Philadelphia in 2004. Fast-forward to today: They have completed more than $30 million in real estate transactions involving private capital.
Think they would be where they are now if they had used just their own money? The beauty of all of this is that the $30 million worth of transactions they’ve done represents so many passive investors whose lives they have positively affected by earning them a return that they likely wouldn’t have gotten in other types of investments. Raising money is a win-win-win game. Residents win because you buy properties and improve the quality of life at those properties. Your investors win because you give them good returns.
And you and your family win because you grow your real estate portfolio to the next level. And if you choose to continue adding value to your investors and scaling your real estate empire, future generations can win as a result of your success. You can go from wanting to scale your real estate company to actually creating a legacy as the person who produced generational wealth for your family. How cool would it be to have your primary financial focus move from whatever it is today to being focused on how to create wealth for your kids’ kids’ kids? It’s all possible as long as you follow the guidelines set forth in this book.
Just remember, regardless of the types of challenges you will undoubtedly face along your journey, you can choose to use them as lessons to spring-board you to the next level. The thought of raising money can be scary at first, but just as we talked about earlier, scary things, when acted on, open up a brand-new world of possibilities for you. Good luck, and congratulations again on buying this book. Now, let’s get into it.
INTRODUCTION Let me start by saying that I commend you for looking to expand your real estate business and raise your game by bringing in private capital. I know of no better way to exponentially expand a real estate business than to bring in eager and willing investors to win alongside you as you grow. This book is intended to be a road map for real estate investors who are looking to take their business to the next level by injecting more private capital into their business. I will explain the step-by-step process to acquiring, securing, and protecting private money.
This book will teach investors how to look into their current network for potential private money partners. It will also teach them how to provide a win-win proposition to money partners, all while building the real estate investor’s own business. I will discuss the specific roles in a deal: the person providing the deal and the person providing the cash and how they both benefit. I will go into deep discussion on how to work with your money partners and what types of deals will best benefit them based on their goals and the source of their capital.
Most important, I will discuss how to protect you and your investor as you structure deals and how to unwind things when you are done. This book will be full of stories from my personal experience because I’ve lived it. I’ve borrowed and lent money, completed fix-and-flips, bought apartment buildings, executed the Buy, Renovate, Rent, Refinance, Repeat (BRRRR) method. You name it, I’ve done it.
I’ve made plenty of money using private capital. And you can too.