The Top 5 Mistakes to Avoid When Raising Capital for Syndication
You never know when an exceptional multifamily deal will come across your desk. The truth is it could happen at any time, and when it does there are a lot of things you’ll need to do. I can tell you from firsthand experience that you’ll have more to do than you can handle.
I’ve found that many new syndicators seem to make some of the same mistakes when trying to raise capital, so I’d like to share what they are and offer you some ways you can avoid them.
Mistake #1: Raising Money Only When You Have a Deal
One of the top 5 mistakes to avoid: starting to raise money only when you have a deal. If you haven’t been actively raising money before this deal came to you, you’re going to be frantically scrambling to find investors and raise money. Unfortunately, raising money in a hurry is problematic.
Potential investors don’t really know your track record or abilities, and it takes time to build a relationship with them. If you are new to syndication and reaching out to your network to raise money, it takes time for the people you know to see you as a syndicator and change their view of what you do now. People simply need time to digest your new business. Hence, reach out to your network and talk with them about what you do now ahead of time.
When I started syndicating, I found that some people didn’t know what syndication was and how it worked. If you reach out to people months before you have a deal, it will help to educate them and allow them time to learn about it. The time that you don’t have when you already have a deal under contract. To educate potential investors, you have to sit down with them and explain the passive investment process, how it all works, and how you make money as a syndicator. If you do all of this before you have a deal to present, then you won’t have to worry about running out of time to fund a deal.
I’ve found that it’s essential to have an online presence, including a website and a social media plan that includes posting on Facebook and other social media sites, or consider having your own podcast. This will expand your contact base and put you face-to-face with new potential investors.
Just remember to do it all before that exceptional deal crosses your desk! When you do have a deal you want to share, go back to your contacts that you’ve spent time with and share your deal. They already know you, so it will be a lot easier.
Mistake #2: Raising Only the Amount of Money Needed to Close the Deal
Let’s say your deal is for a multifamily property listed at $6,000,000. Don’t be tempted to think that you only need to raise 20%-25% of the down payment to close the deal. Yes, it will be enough to seal the deal, but what about deferred maintenance, renovation, and other projects? ( That can include large unexpected repairs, for example, like finding out you’ll need a new HVAC system or a new roof, which can cost upwards of $500k plus).
In addition, some of the investors who expressed an interest will end up backing out, and having an excess or reserve will help fill in the amount you lost. Your 20% cushion will help weather that storm.
Mistake #3: Not Knowing the Law
There’s an old expression that states “Ignorance of the law is no excuse.” Actually, it’s also part of the law, as defendants can’t use that line as an excuse for inadvertently committing a crime. There are some SEC regulations you’ll have to become familiar with before raising any money.
When you syndicate a property, you form an LLC (Limited Liability Corporation), and then sell shares in that LLC which owns the property. Because you’re selling shares, which are considered securities, you have to comply with SEC regulations.
There are two kinds of investors: accredited and non-accredited. Non-accredited investors can participate if they’re considered “sophisticated investors.” Based on the SEC’s Regulation D, Rule 506, investors are considered “sophisticated” if they have experience in financial and business matters that enable them to evaluate the risks of a prospective investment. You’ll also be required to have a pre-existing relationship with each investor.
When you have a deal pending, you can’t be building that relationship. So the time to build it is long before your deal becomes available. I work with both types of investors, so I spend time building relationships with them before ever approaching them with a specific investment opportunity.
Mistake #4: Not Automating Your Process
When I started out as a syndicator and had my first deal, I repeated the same dialogue with every investor I approached. There were a lot of meetings, and I spent a lot of time repeating myself over and over again. The amount of time I wasted was staggering!
Now, I automate the process and send everyone an email with the presentation attached. This is followed by a live conference call, where over 100 investors hear me talk about the deal and I don’t have to repeat myself. Not even once! I record the call and send it later to others. It works like magic and saves an inordinate amount of time in my schedule.
My advice: automate! Time is money in this business, and the more you can save, the more you can make.
Mistake #5: Thinking That Raising Money Ends When You Close the Deal
You’ve talked to investors, you’ve raised the money needed along with an extra 20% for contingencies, and the deal closes. You’re finished, right? No! The key to success as a syndicator is to always be raising money. Every time you spend a lot of time interacting with an investor you’re raising money from him or her for your next deal.
You have to be open and honest with each investor, every time you meet - even when things don’t go as planned. The key is to communicate with each investor on a frequent basis. I send monthly emails with property updates, which include vacancies, number of units that we’ve renovated, operating income reports, and more. I also send out quarterly financials, so each investor can see how we’re doing.
This is an excellent way to stay in touch with your investors and provide key details of your investments. It helps to cement the relationship you’ve built, and it keeps you in contact with your investor base. When the next investment opportunity comes along, you’ve already done the hard work because you don’t’ have to start from scratch with your investors.
New syndicators tend to make the same mistakes over and over again, so I’ve put together the top ones and how to avoid making them. The first mistake is raising money only when you have a deal. Unfortunately, that’s too late! There are too many things that happen when you have a deal going on, and you can’t possibly take the necessary steps needed to raise money. Always meet with investors, tell them about yourself, and educate them about how syndication works - before you have a deal to present. When raising money, always raise an additional 20% over what’s needed, because surprises can happen (CapEx - Capital Expenditures, for example), some investors can back out and issues may pop up. Consider it a contingency fund. Know the law - the SEC has specific requirements for investors purchasing shares in your entity, and you don’t want to violate their regulations. Automate your process as much as possible. Send an email with the deal’s details attached, and then hold a live conference call with all investors at one time. It will save you countless hours over meeting individually. Finally, remember that raising money doesn’t end when the deal closes. It’s an ongoing process that you have to do continuously if you want to be successful as a syndicator.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. 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.
Ellie is the host of REady2Scale , a podcast that focuses on the "APS" of real estate: Asset, Process, and Strategy. Each episode discusses how investors can scale their real estate portfolio and/or businesses.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.