Established real estate investors who’ve been involved in raising private capital generally don’t have trouble finding private money lenders. After all, they’ve made a name for themselves and have (hopefully) proven themselves a worthy investment partner.
For newer investors or those who haven’t delved into the world of private money lending, however, raising capital can be a big challenge. Who do you ask? How do you ask? What will give you the best chance at getting funded for your real estate investment aspirations?
As with anything in real estate investment, smart planning and foresight are essential. Real estate investors need to know the best way to make their case to private money lenders if they want to be successful.
5 Keys to Getting Private Money Lenders On Board
Build Up Trust
The most important element in any business transaction is trust. You build up trust by building up relationships. Networking is an essential part of forming a pool of potential lenders, but you’ve got to dive deeper to reap the rewards that turn potentials into partners. Have coffee a few times, take them out to dinner. Talk shop, get to know each other. When you make that connection, you’re much more likely to see results than by cold-calling your connections in an impersonal, canned way. You may think you’re saving time, but...you’re not. You’re wasting it. Forget mailers and elaborate, glossy-but-impersonal presentations when it comes to talking to lenders one-on-one.
Prepare Your Pitch
Speaking of mailers and glossy presentations...you do need a pitch prepared. Pitches don’t have to be some big, drawn out events with bells, whistles and PowerPoints. Train yourself in the art of an elevator talk. Something short and concise that can be expanded upon, but can also be delivered easily, confidently, and without wasting anyone’s time.
Your pitch should be on the level of the people you’re talking to. Don’t fill it with fluff: you don’t need to explain market conditions or define terms that everyone in the industry knows. You’re there to sell. That means catching their attention right off the bat with something that you really believe in. You pitch should cover the key issues (we’ll talk about those in a second) and you need it down pat. Confident delivery. This is your plan, this is what you need, this is the deal.
Understand that your authenticity and knowledgeability, along with your reputation, are invaluable. With so many stories of “investors” bilking lenders out of millions, people are skeptical more than ever. You have to know your stuff, have your plan, and sound like you know what you’re doing.
Cover the Key Issues
We’ve already established how investors should cut the fluff from their pitches to be successful. So what should you leave in? Why, the key issues of course! Entrepreneur explains four of them:
The Project — What are the lenders lending to? How does your approach or business stand out among the hundreds of thousands of other deals they could take? What will make this project successful?
The Partners — Who all is involved in this project? If you don’t have another partner at the table, talk about your own experience: your expertise and success in this field. Otherwise, define the key players, their track record, and the sort of information that will build trust in the people running the show.
The Financing — What kind of lending are they getting themselves into? This is where you talk about how the project will go. Done something like this in the past? Highlight those numbers. Just projecting? Make modest, realistic estimations founded on good math. Talk about where all the money is coming from. Is a bank loan still involved? Is this a pool?
Where’s the money going? How are you allocating funds? What’s the total needed? What can they expect from returns? Have answers to questions like these at the ready. You shouldn’t feel the need to gloss over details. Get into the nitty-gritty
The Management — As we’ve mentioned in the past, management can make or break a project. So much success hinges directly on them. You may be at the top of the pyramid, but who’s handling the day-to-day stuff? What’s the management team like? What’s their experience? Investors need to know how the management will uniquely contribute to the success of your investment. Your plans can be perfect, but if the right people aren’t seeing them through, it doesn’t matter.
Be Prepared for Questions
What will potential lenders ask? This is where knowing your pitch backwards and forwards comes into play. Memorize the details of your plan. Be prepared to answer questions and answer them honestly. Don’t gloss over the truth or say things for the sole purpose of sweetening the deal. Yes, you should be able to project realistic returns. You should be confident in every answer, even if you have to admit the details haven’t been worked out yet. When someone asks you questions, they’re seeing if you’re up to snuff. Some pitches fall apart when the investor hasn’t thought through all of the important details.
Promises You Can’t Keep
One of the worst mistakes real estate investors making in pitching to private money lenders is dreaming too big. Lenders are much more likely to take a modest deal over an extravagant one due to the correlation between risk and reward. Don’t make your project sound too good to be true. If you think it is, you’ve probably got some numbers to re-examine.
Be realistic about what will happen if things don’t work out. Have a Plan B for your investors that minimizes their losses or eliminates them entirely in a worst case scenario. Most of all, don’t make promises that you can’t keep.
For real estate investors, raising capital from private money lenders can be a challenge: but it’s not impossible. Be prepared, be confident, and build trust. You’ll do just fine.
What do you think makes for the best pitch to private money lenders? Share your strategies in the comments.
image credit: 401kcalculator.org