How to Raise Capital from Family and Friends When You’re Just Starting Out
The lifeblood of a Sponsor is the ability to raise capital in order to fund real estate deals when the opportunities present themselves. Without capital, you’re basically out of business as a syndicator. No capital - no deals! There isn’t any other way to say it.
The best place to start looking for capital when you have limited experience is with people who know you and trust you, which come down to your friends and family. Nobody knows your abilities better than they do. They also know your work history, your successes and your passion to get deals completed. So that’s the first place to start.
But how do you approach people you know and ask for money? After all, some people may think you’re crossing the line when you take friendships and family relationships and use them as to secure funding. The fact is, you’re not crossing any “line” at all, but rather you’re providing a chanced for those people you care about to participate in an opportunity to make money.
Also, be sure you follow the rules about accredited and non-accredited investors, and be sure to explain it to your friends and family. Accredited investors usually earn $200k per year or have a net worth of $1M or more. You’re allowed to solicit funds from up to 35 non-accredited investors, but make sure you don’t exceed that number.
Step 1: Prime Investors
When it comes to soliciting funds, don’t wait until you have a deal in hand to offer someone. Instead, be preemptive and start engaging your friends and family early - in fact, the earlier, the better. Here’s why: once you have a deal in hand, you’re not going to have a lot of time to raise money. If you engage everyone early and get firm commitments to participate with you, you’ll be ready to package the deal and move forward.
Always outline the financial options available and anticipate questions that friends and family will be asking. here are some of the most common questions I got when I just started syndicating, and you should prepare to answer them as well:
1. Are you doing it on your own?
2. Who’s else is on your team?
3. What is a syndication and how does it work?
4. What markets are you going to invest in?
5. What will be your business plan?
6. What returns should I expect?
7. What is the minimum investment?
8. Can I participate even if I’m not an accredited investor?
It’s all about building awareness with your targeted audience that you are now in the real estate syndication business. As a Sponsor, you’re going to be the one telling your friends and family that you have found the ideal opportunity for passive investors. By preparing them for this, you’re changing their mindset about you, fostering credibility and demonstrating that you have the business acumen to do what you say you can do. This will pay handsomely as you start marketing your deals.
Even if you don’t have extensive experience and you’re working on a limited budget, there are still things you can do to help build your business. Just make use of the tools and resources that are available to you so you’re not stuck doing everything yourself.
Step 2: Educate your Audience
Many people who are not passive investors or who have never invested in real estate syndications before have no idea what real estate syndication is all about. So you have to be the teacher, educating your target audience as to how a syndicated deal works, and why you are the right Syndicator, or Sponsor, to work with.
One of the benefits of educating your audience is that you will not only be describing how syndication works, but also how you approach the process. This personalizes the syndication effort, which is a goal that you definitely want to achieve.
Always explain exactly how the funds you’re requesting will be used. That includes total amount needed, milestones for funding and a timetable outlining how the money will be distributed over the next several months. This helps to promote credibility for your investments.
Step 3: Estimate The Amount You Can Raise
After educating your friends and family about syndication and your new role as a Sponsor, ask about their investment potential. How much could they realistically afford to invest in a deal if you brought one to their attention? This will give you a clear idea of how much money you’ll be able to raise when adding up all the amounts potentially available from your target audience.
That is one way to find out how much capital you will be able to raise for a real estate deal when an opportunity presents itself. Determining your potential raise in advance will save you a lot of time as deals come your way.
Step 4: Make an Offer to Join Your Investment
Once you have a deal under contract (meaning that you signed a purchase and sale agreement with the seller), send an email, call or text your potential investors, and present the opportunity to them.
Staying in touch with your friends and family for potential investments is possibly the most important step you can take. By constantly communicating with the people who could potentially invest in your deals you will have a pipeline of investors who will be ready to join you when the right opportunity comes along.
Communicate with your friends and family via text, email, social media and in any way that both you and your target audience feel comfortable with. Discuss offers you’ve looked at, what markets you’re looking at and even some deals you’ve passed on along with the reasons why you didn’t move forward.
This ongoing dialogue will show your thought process as well as demonstrate your knowledge about multifamily deals, real estate markets and the overall decision-making process. This dialogue is a valuable tool that will pay dividends once you have a deal to present for investment.
Step 5: Reengage After a Deal is Closed
This is an important step that many people forget to take, but it’s essential for building future investment relationships. You want to reengage with everyone after a deal is closed, and that includes those who decided to not participate in the deal this time around.
Not only will you be keeping everyone who did invest in your deal informed about the deal’s progress, you’ll also be letting those people who chose not to participate know what type of deal you successfully syndicated and why you chose that particular property. It not only demonstrates your success in closing the deal, it demonstrates your knowledge - a critical step to take for when the next opportunity comes around.
You should also be talking about where you’re looking at deals, why you chose those market you chose and some key information about market performance.
Tip About Budgets
One thing that I’ve learned when estimating the amount of capital I need to raise is to always raise 20% more than I think I’ll need to make the deal viable. The reason: some people do drop out at the last minute because of unforeseen circumstances. If that happens, you’ll be short on funds and scrambling around at the last minute to find another investor is not a pleasant experience.
lf you’re just starting out, the best place to find funding for a syndicated real estate deal is with your friends and family members. Engage them early, educate them about what you do and what syndication is, and always raise more than you actually need.
About the author
Ellie Perlman is a real estate investor who owns over 2,000 units across the US worth over $250MM. Ellie is the Founder and CEO of Blue Lake Capital, a real estate investing firm specializing in multifamily investments. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
She started her career as a commercial real estate lawyer, leading commercial real estate transactions for Israel’s largest development company. Later, as a property manager for one of Israel's most prominent oil and gas company, she oversaw properties worth over $100MM.
Ellie is a Forbes author on real estate investing, the host of the podcast "That REllie Happened?! Unbelievable Real Estate Stories" and a writer of a weekly blog you can find at www.ellieperlman.com.
Ellie holds a Maters in Law and and MBA from MIT Sloan School of Management.