I am often amazed when I meet new investors at networking events with how lazy people can get with their money. Often a new real estate investor is someone in their 30's to 40's, tired of their job, making a steady median income. Since they have a stable job, they are able to obtain easy credit and financing from banks. Often these investors will have access to a home equity line of credit, a wide arsenal of credit cards and will have an RRSP account with 30-40k (if they're responsible) and have saved 10-20k cash and are ready to do a deal - with their OWN money.
The sad thing is, this type of new investor has been working since they were 18 to reach this meagre cash position and they are now in their mid thirties and ready to start investing.
Yesterday, I was attending a local investment club in Winnipeg and I was pleasantly surprised to see how many investors in the club were ready to STOP using their own money and START raising capital to grow their real estate business.
The truth of the matter is, in business or real estate, you will ALWAYS run out of money... ALWAYS. No matter how much cash and credit you have, it always gets 'tied up' in a deal and you eventually run out.
I began investing at the ripe young age of 22 and the great thing about beginning so young is that I had virtually no cash, no credit and no credibility. I had to learn to raise cash, manage my small amount of credit, and leverage credibility. I had to learn the skills required to play the game with no cash from day 1 because unlike the average 35 year old new investor - I HAD NO CASH, NO CREDIT AND NO CREDIBILITY. I was a punk kid who had taken $2000 worth of real estate investing seminars and had to make the dream happen.
My investing career didn't begin to take off until I learned a very simple principle for raising money. This principal has allowed me to raise money for ALL of my deals (except my first one where I put down a small downpayment of $1200 cash). Since I learned the fundamentals of raising money, I have never put down money on an acquisition on any business or piece of real estate under my control.
Most investors think that cash is king, and they are terrified of raising money for a deal. The truth is CASH IS TRASH, everyone has it, and it's actually a very worthless and cheap commodity that can be easily attracted if you understand a few key principals.
There are 3 major parts to putting a deal together and raising all the cash you will ever need. The parts major parts are:
- The Money = The cash required to start the business or acquire the real estate
- The People = The TEAM that will operate the business or asset
- The Deal = The business or asset itself.
Most new investors do not understand the 3 fundamental parts of a real estate deal and run around trying to raise money the WRONG way and they burn their credibility and look like total fools to their network of potential investors.
The Rules of The Money, People, Deal game.
- The rules are simple: he or she who can obtain 2 of the 3 pieces required for a deal will get the third. For example, if you have a DEAL + PEOPLE... the MONEY will come every time. I have never had a deal fall apart because of lack of funding.
- If you only have control of 1 of the 3 pieces, you have NOTHING. You are worth nothing and can't make a transaction happen.
- The most valuable piece in the game is the DEAL. The better the deal, the easier it is to find the money. If you are incompetent or don't want to do the DEAL, you can always sell to another investor for a fee. This is very lucrative and I recommend it every day of the week.
- The least valuable piece in the game is THE MONEY. This is because everyone has access to it. Money earns virtually 0% on it's own, it's constantly depreciating, and it can come from anywhere for a price. Cash investors will line up for a good deal and will compete and bid if they know it's a winner.
- The people are interchangeable and so are you as the person running the deal. You are part of the people team. Make sure you have a good team and management style so you can add value to the deal and become an irreplaceable lynchpin. Develop a brand and you will become harder and harder to replace.
- The deal drives the whole game and is the KING of the 3 pieces. The deal is the piece you should seek first (in my opinion). You can always sell it to another investor if you can't pull it off. I love buying deals from investors who want to pass or cannot close.
So many investors run around, trying to raise money without a team or a deal. This is absolutely the wrong approach.
The correct approach for playing Money, People, Deal is to:
1) Find a deal first, get it under contract with an escape clause and allow yourself a 'due diligence period' or another condition to delay your contract.
2) While the deal is tied up, begin assembling the Team as required to execute the deal.
3) Once you have the deal under control, and the people under control, begin shopping investors for money. Always have a PROFESSIONAL business plan/loan proposal prepared and be extremely thorough in your plan.
Show your investors the:
- The Best case scenario
- The realistic case scenario
- The worst case scenario
- The NIGHTMARE scenario
It's very important to run your investor through these scenarios and make sure that they are ok with loosing all of their money, or recovering from a NIGHTMARE scenario.
Once you have 2 different investors interested in funding you, you have pressure to negotiate and can close very easy. I like to split all of my deals 50/50 with my money partners because I don't like to haggle and "bite the hand that feeds". I prefer to overpay and reward my partners for investing in me. When I call them in the future, they are delighted to do more deals with me and have a cheque ready for me in minutes. I earn so much money for my repeat deal partners that they don't even think about going anywhere else.
After your first raise, begin building a track record, document every deal into a track record... then - rinse and repeat!
You can repeat this process UNLIMITED times and you will NEVER run out of capital.
What will eventually happen is, you will have more money waiting in your pipeline than deals, and then you will want to find people to bring you deals to keep your machine running. This is a great position to be in, and one that I am currently enjoying.
Homework: Think about the last time you attempted to raise money and ask yourself: Which of the 3 pieces did you have before raising capital? Were you prepared with an adequate business plan? Were you successful or unsuccessful? What could have gone wrong and what could have gone smoother?
Money raising is the ultimate skill of the entrepreneur and one that everyone should learn to perfect. I learned this skill early in life, and I will never be without capital again.
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