This is an excerpt from the book Raising Private Capital by Matt Faircloth. Order today!
Would you put your life into the hands of a pilot on his first day in the cockpit of an airplane? Of course you wouldn’t. You would be foolish to do that. How about investing with a financial planner who has no experience, training, or knowledge of wealth-building strategies? You would be foolish to do that also, of course. The same goes for us real estate investors. When presenting a deal, you are asking your potential Cash Providers to put their financial futures into your hands when they invest with you. You owe it to them to have your act together so that you can be a trustworthy steward of their money. I know that we live in a world of instant gratification, especially for my younger readers out there who want to reach financial freedom by next Tuesday. I love your enthusiasm, but you need to know that real estate investing is a marathon, not a sprint. To be truly successful in this business, you will need to spend dedicated time preparing before you get started with private money. I can tell you that your growth will be exponential if you take the right steps first and don’t just jump in and figure it out. You can do that, and you may even get some people to invest with you. But without the right tools, you won’t grow very fast, and you may even step into pitfalls that you could have avoided had you properly prepared yourself.
Not to scare you with analogies that may take you back to your high school or college days, but there are some prerequisites to raising private money that I’ll lay out for you. You don’t need to do them in any particular order, but the more proficient you are in these four areas, the better off you will be when you start going out and raising money for your deals.
Prerequisite No. 1 – Get Educated
First and foremost, a successful business owner never stops learning, so if you plan on being successful, plan on continuing to learn throughout your entire career. My most successful friends read a book or more a month. There is an adage that “leaders are readers,” and I’ve found this to be 100 percent true. There are so many great real estate and foundational business books out there for you to choose from. If you gain one concept that will better your business from each book and commit to apply it moving forward, it’s worth it.
When Liz and I got started, we took an entire year to become educated before we bought our first property. We attended countless local real estate meetings and took as many courses as we could on the subject of real estate investing. We read books together and talked about how to apply what we were learning to our future business. It gave us a solid foundation of knowledge and best practices to build from, and today I still use many of those strategies we learned.
Another way you can get educated is to consider taking the classes that real estate agents take to get licensed. Those classes will teach you every aspect of the real estate transaction and help you build your network if you take the classes in person. Once you complete the coursework, you can consider getting your real estate license for some additional income while you build your real estate investment business. Some of the most successful real estate investors I know started out as agents and slowly built their portfolio of rentals until they had enough income to stop agency work and invest full-time.
Specifically, here are some foundational areas of the business that I think are necessary for you to get educated in if you are going to be successful.
The Real Estate Transaction – Learn every aspect of buying and selling property, and the language that is associated with real estate transactions, so that you can clearly and competently communicate with agents and other professionals you will need to work with.
Negotiation Skills – These are invaluable skills that will aid you in getting good deals, building contractor, vendor, and partner relationships, as well as determining terms and conditions with your Cash Providers. If you don’t feel as if negotiation is a strong suit for you, there are some tremendous courses that you can take to sharpen these skills. Regardless, this is one skill that you will need to have to be a successful Deal Provider.
Accounting and Finance – For you folks out there who aren’t numbers people, the bad news is that the real estate investment business is full of numbers. It’s a numbers- and accounting-based business, so you need to learn to read, understand, and create financial statements for your deals.
Prerequisite No. 2 – Develop a Track Record
Beyond the textbook and theoretical education, you also need to get your hands into this business and learn by doing. Would you ever teach your child to ride a bike just by reading them a book about it? While that might be a great way to introduce the topic and get them comfortable with the idea of riding a bike, your child will need to physically get on a bike to really learn how to ride. Learning a concept on paper is one thing, but applying it in the field during a real estate transaction will ingrain it into your memory forever.
Once you build your educational foundation, you can go out and begin investing with your own capital (if you have it). This is the easiest path and the one I highly recommend, if it’s possible for you. Potential Cash Providers will like to see that you put your money at risk in this business ahead of theirs. If you don’t have your own capital to get started with, you will need to get exposure to real estate deals with the following activities, none of which requires much monetary investment (or requires less than the capital needed for a deal):
Become a Real Estate Agent
This option works well for many people I’ve watched grow over the years. If you hang your license with the right company, you can make enough money as an agent to manage your personal expenses while you build your investing business. If you come across a great deal, take your Realtor hat off and put your investor hat on. Additionally, you should find a few trustworthy real estate investors to take on as clients and see whether they will allow you to witness and be a part of every aspect of their transaction. Document every step in the process and what you learn along the way.
Become a Wholesaler
I can’t speak too much on the nuts and bolts of wholesaling because I am not a wholesaler. However, I have worked with wholesalers closely for years. In essence, a wholesaler gets a deal under agreement (contract) with a seller and then assigns his or her position in that contract to an investor for an assignment fee. It’s a good way to get started, meet other investors, and make a few dollars while you are at it. The trick is that wholesaling can be a full-time business by itself. It takes money and time to market for deals. You will need to make a decision at some point: Do you want to be a full-time wholesaler and ramp up that side of the business, or are you doing it as a stepping-stone to get into being a landlord and flipping?
Become a Project or Property Manager
There is no better way to get hands-on experience and learn the landlord or flipping business than by being a project or property manager. You will experience firsthand the day-to-day activities—the good, the bad, and the ugly. More important, you will get to learn while working on someone else’s rental or flip project. This is so important because, in essence, he or she will be paying you, which in turn means that you will get paid to learn. If you find landlords or flippers who are still doing a lot of the day-to-day activities themselves but are on a growth spurt, pitch them on doing this work for them to help them grow while they help you learn. This arrangement can be a really good win-win scenario.
Find a Mentor
Another option is to find a mentor (a more experienced investor) and become his or her mentee. Mentors can be invaluable, as they can keep you out of trouble with their perspective and experience. They can help you avoid the mistakes they made themselves or repeat their wins by using the same formula they used.
One of the best ways to find a mentor is to seek out someone (or a company) you want to emulate who is investing in the exact type of investment vehicles you are interested in. You want to find the investor you want to be “when you grow up.” Once you find a mentor, figure out how to add tremendous value to his or her business. So many people approach me and, before learning about our business and/or how they can help, begin the conversation with “Can you be my mentor?” Instead, first learn about mentors’ business, goals, and focus areas. Then go to them with ideas on how you can add value to their business. All seasoned investors have tasks that they wish they could off-load on someone else—whether it is social media related, property management related, or office related. Additionally, every single seasoned investor is looking to grow in two areas: finding money and finding deals. Figure out how you can add value by helping investors find money (to put deals together) and find deals (to invest their money). If you can do this, they will want to do whatever they can to help you.
Regardless of which path you take to develop a track record, it’s important to keep a running document of every real estate investment deal you have interacted with. What did you do on the transaction? What were the results? Did the project achieve its ROI/profit targets? Why or why not? What did you learn? Compile all this data into a track record document, which will summarize the deals you have done and the highlights for each deal. It will benefit you greatly when you sit down with your first Cash Provider and show him or her the experience you’ve gained in this business, what you’ve learned, and the profits/ROI you’ve helped create.
Are you ready to invest?
One of the most frequently asked questions in the BiggerPockets forums is “How can I start investing in real estate with no money and bad credit?” The answer? You shouldn’t. You need to fix your situation and invest from a position of financial strength.
Prerequisite No. 3 – Take a Personal Inventory
When I say “take a personal inventory,” I mean take a look at what you bring to the table first. What do you possess that will benefit your Cash Providers? Why would these individuals choose you over some other real estate investor? What makes you a unique investment? What are your strengths and weaknesses? Don’t ever forget that although you may have a smoking-hot deal that will produce a great return, the primary thing that a Cash Provider will want to vet out is you. Here are the key “personal inventory” areas that I invite you to assess and/or gain clarity on for yourself.
Time – It is imperative to become clear on how much time you can put toward real estate investing. Many of our Cash Providers like the fact that we are full-time real estate investors. We are always there if they have a question or even want to walk a property. I am not saying you have to be full-time; however, you need to be clear with yourself and your potential Cash Providers regarding the time you do have to put into your real estate investing business.
Money – If you are looking for private money, many potential Cash Providers will want to know whether you are going to put in money (whether you are going to have some skin in the game). Some real estate investors will tell you that they don’t put any of their own money into a deal, and other investors will tell you that they do put in money along with the Cash Provider. Regardless, the key is to be clear on your personal financial position. What personal resources and/or assets do you have the potential to use? Don’t let the answer to this question stop you. You can be successful whether or not you have money to invest.
Once you have an answer for this, you will then need to establish how much private money you are looking for. One of the best things we have done with most of our private money deals is to use them to purchase and rehab the property (either for buy-hold or buy-flip). In other words, this has allowed us to do cash deals and then refinance once the project is complete (sold or rented). The deal moves faster this way, which makes everyone happy.
Skills – What are your skills? What are your strengths? Every single person reading this book (and in this world, for that matter) has skills. Each of us is great—even excellent—at something. The key is to identify your strengths and then figure out how to translate these skills and strengths for the real estate investing world. The good news is that many skills are transferable. For example, say you have strong analytical skills, and you have gained these skills from many years of working in the auto industry. Well, this skill (even though it is from another industry) could be hugely beneficial when analyzing real estate deals.
The first step is to gain clarity on your strengths and skills. Then you can determine your gaps (skills that you need that you don’t possess). You can deal with these gaps by learning the skill yourself, by developing a team, or even by forming partnerships.
Your “Why” – This one is fairly simple and straightforward. You need to become crystal clear (and honest) with the reasons (and motivation) you are investing in real estate. I invite you to go deeper than simply “making money.” This is not deep enough. There are so many different ways to make money in this world. You need to be able to answer: Why do I choose real estate investing as a vehicle to make money? Every Cash Provider needs to trust his or her investor. You build trust by sharing your goals and reasons for getting into real estate investing with people. You also build trust by being as authentic and transparent as possible with your Cash Providers.
Your Goals – I see so many new investors who just want to jump in and take action. Their motto is “Any deal will do as long as it’s a real estate deal.” The problem is, they don’t have a clear set of goals to follow, so they don’t really know where they are going. They are like a ship without a compass. They may discover a treasure, or they may end up sinking, and both are likely. You need to set some short- and long-term goals, mostly for your own benefit to keep yourself focused and on track. I recommend setting goals in the following increments: one year, three years, and five years. This will give you some short- and long-range plans to strive for. It will also benefit your potential Cash Providers because they’ll be able to see where you are going and where they will go if they decide to start funding your projects.
Prerequisite No. 4 – Create a Business Plan
The last prerequisite is developing a solid business plan to take what you have learned and put it into action to manifest your goals. There are hundreds of templates out there for business planning. One of the best models is from the book The One Page Business Plan by Jim Horan. I can remember the day as if it were yesterday when we filled out Jim Horan’s one-page business plan template and, as a result, our company, the DeRosa Group, was born. Having a strong business plan in place will help guide your actions and activities, since it is very easy to get distracted in this business. Besides creating your vision and mission, your business plan should consist of three aspects: a strategy, a market analysis, and a team.
Strategy – So now that you have your goals set, how are you going to get there? Will you be doing fix-and-flip projects, rentals, or both? What types of properties will you be going after? How will you finance these transactions, and what is your target profit for each deal? What is your role in this strategy and plan? What are specific action plans that you can follow to achieve your goals and objectives?
Market Analysis – If you are looking to invest in Albuquerque, you’d better know that market like the back of your hand if you are going to make a good impression on your potential Cash Providers. If your strategy includes buying and holding, what are investors buying properties for in that market? What is market rent? What is a good deal? What amenities does the typical renter look for? Who are your typical renters? What is the prospective cash flow that can be expected for a market rate deal? If your strategy includes buying and flipping, what are the types of homes buyers want? Is it a strong buyer’s market? What is the average sales price for a nicely renovated home? Consider other factors like major employers, current job market, median income, crime rate, and school system.
Team – No real estate investor I know acts alone. It takes a team to be successful in this business. Depending on your real estate investing niche, your team members will vary. However, here are some key team members that most real estate investors have: wholesalers, investor-friendly real estate agents, bankers, a CPA who specializes in real estate, an attorney, reliable contractors and general contractors, an insurance agent, a title agent, and a property management company. Not only will these team members help you run an effective business, but building a strong team will show a potential Cash Provider that you have done your homework and have a network of people who can help you reach your goals.
Now it’s time to take inventory on these prerequisites. When you begin to evaluate yourself in each of these areas, make sure you assess where you are currently and where you want to go.
- Prerequisite No. 1 – Get educated (real estate transactions, negotiation, accounting and finance).
- Prerequisite No. 2 – Develop a track record.
- Prerequisite No. 3 – Take personal inventory (time, money, skills, your why, your goals).
- Prerequisite No. 4 – Create a business plan (strategy, market analysis, team).
Once you have taken inventory on yourself, it’s time to compile everything. I suggest that you take everything from prerequisites one through three and create a résumé for yourself. It should powerfully state who you are, where you have been, what you bring to the table, and where you want to go. That, along with the business plan described in prerequisite four, will provide you with a solid presentation to put in front of a potential Cash Provider. If you take the creation of this seriously, you will have a concrete road map for yourself and a real case for why you are a great investment for any Cash Provider.
Want to read more from Matt Faircloth? Check out Raising Private Capital on the BiggerPockets Bookstore!