Issue #2: Raising Money For Real Estate
What I Wish I Had Known 10 Years Ago
Welcome to The Sophomore, The Follow-up, The Second Edition…of the Good Neighbors Newsletter, where we’ll explore the ways in which real estate development and entrepreneurship can combine as a force for good in our neighborhoods.
We’ve welcomed 52 new subscribers since the last issue, so if we follow that growth trajectory we’ll have every human on Earth as subscribers in approximately 18 months :)
Below you’ll find 3 sections, with which I may experiment in future issues: (1) An essay, (2) Things Worth Sharing, and (3) Parting Thoughts & Updates.
Raising Money For Real Estate
So you want to do real estate deals.
Maybe you don't know how to start, or where to go next, or what type of real estate to focus on? Here's my quick & easy guide: continue reading for only 10 monthly payments of $29.99...just kidding. It's free (but not cheap, as Austin says).
I’ll go into more detail on many of these topics in future issues, but if you have questions please don’t hesitate to reach out directly. I’m trying my best to provide what would have been most helpful for me early on.
📓 Quick Note #1: this is not meant to be a guide for those of you who already have access to capital, though there may be a few nuggets in here for you. It is a framework to navigate options for a confusing & overwhelming process, for people willing to hustle and power through the myriad of ways deals wither and die their sad little deaths.
📓 Quick Note #2: I don't have this all figured out. There are plenty of people who know much more about each of these areas. But there probably aren't many that have gone both as deep and wide as I have. Over the past 10 years, I've raised money for private equity funds, large-scale real estate developments, house flips, software startups, acquisition of a service business, crowdfunding campaigns, opportunity zone businesses, and opportunity zone real estate projects.
While there is some overlap between raising money for real estate and operating businesses, the following is focused on small to medium-sized real estate deals (<$10M total project cost). Bigger projects can work in the same way, but often you're dealing with institutional partners (big funds) and that's a different beast.
🔰 The Starting Point:
🤷🏾 What Kind of Real Estate Should I Look For?
This is a bit like telling an entrepreneur what kind of business they should start. You’ll need to figure this one out on your own based on your skillset, knowledge, and what lights you up.
One tactical bit of advice, though, is to make sure you match the size of the project to the amount of money you think you can actually raise - e.g., it tends to take a very long time to fill a $10M project with $1,000 checks from friends & family.
Also, don’t even consider self-storage deals. This topic deserves its own post in the future, but for now please know that if you add one more self-storage deal to this world I will find out about it, and I will go on local, regional, and national television to publicly and personally shame you for your willing contribution to both the aesthetic and moral decline of this great nation.
👏 I Found a Deal!
🤷🏾♀️ Now What?
In an ideal world, you'd spend time on your access to capital before spending months looking for a deal. But that's not the norm, so we'll start with deal flow.
Maybe you knocked on doors to find a great property. You did your deep-dive into Bigger Pockets, listened to podcasts, started following some great investors on Twitter, sent 100+ cold emails, worked with a broker. However you did it, you found a deal, and you’re excited about it. Now what?
Here are the basics:
📈 Build Your Financial Model
You might not know how to do this. That’s ok. But there is no way around it, you’ll need to learn. You can’t truly know if you have a good deal if you don’t know how to confirm your ideas with real numbers. Here are a few tips:
Adventures in CRE - a great library of real estate financial model templates, with instructions and a free option for educational purposes. An amazing resource, from deep and intricate models to smaller back-of-the-napkin models.
Respond to this email and I’ll hop on a Zoom call with you if you’re stuck. I’ll walk you through and share one of my models if helpful.
📣 Tell The Story
This is often overlooked. You think you have a great deal, a no-brainer. But in the eyes of your audience, it’s just one of many with a projected 15% IRR. And if you don't have a track record of success, your story is all you have. Numbers come to life (or even better, they become less important) if you can get someone to care about your project. You get them to care by telling a clear, thoughtful, impactful story. This takes practice, but here are a few things that can speed up the process:
Use Pitch to build a presentation - The templates are great and the paid version if worth every penny as long as you’re creating decks somewhat regularly.
Here’s a version of the one I used for Chapel. It can be more simple than this, or provide more detail, or use Word / Powerpoint instead, but feel free to copy the categories and flow if helpful.
📦 Make it Easy to Share (then share it)
Gather every bit of information you can get your hands on, and organize it in a data room. I use Dropbox (though keep in mind bankers are mostly still fearful of technology and don’t trust files in the cloud). Sharing a link is much easier than attaching 25 separate files or a .zip file that end up being too big for email. Here are a few categories to make sure you include if applicable (though if you’re doing a small deal some of these won’t be necessary):
Your entity documents (LLC docs, EIN)
Property info (appraisal, comps, environmental Phase 1 and/or Phase 2, contracts)
Photos of property
Financial Model (budget, proforma)
Construction - Feasibility & Schedule
Your Personal Financial Statement (PFS) - don’t include it in the data room, but you’ll need to have it handy if you work with a bank
💰 I’m Ready to Raise Money!
🤷♂️ From Whom?
Let’s start high-level. I have never met anyone on the other side of raising money who said, “well that was easier than I thought!” It makes me think of how David Rakoff talks about writing, that it “is like pulling teeth…” He adds quite a bit more color, I’ll let you look it up if your curiosity gets the better of you.
“Yeah yeah, I know it’s hard,” you say? Whatever you’re picturing, it’s harder than that. Most people give up. If there are 1,000 ways deals die, raising money is 1 through 900 for those starting out.
This is an area I’ll dive into on a deeper level in future issues. For now, I’ll provide a high-level framework and a few things I wish I had known when beginning my journey. The rest is you crawling through the mud under the barbed wire. Go do something else if that doesn’t sound worth it.
Here are your options.
(P.S., I’m working on a more detailed document I hope to share soon that will help you navigate this process on a more granular level, including templates, contacts, etc).
Friends and Family (F&F)
Pretty self-explanatory. In this case, you might not need all the info mentioned above. At a minimum you should still be ready to share a coherent story about the project, why its a great idea, why you’re the person to do it, and back it up with numbers
High-Net Worth (HNW) / Angel Investors
Same as F&F, but with a more formal diligence process. You’ll need to have your ducks in a row. As I read in Matt Knight’s newsletter, Vertical, start following some Angel groups to begin learning more about what they are looking for
Same as above, but bigger checks, harder to find and contact, harder to close, and more formal process
This may be a big part of the future of fundraising, but don’t let anyone ever tell you it’s an easier option. It is hard. Tons of work upfront, can be expensive from the start with many platforms, and there is no guarantee you’ll raise the money you need. The good news is that storytelling and marketing is the most important part, it is accessible to everyone, and investors tend to write smaller checks so they make decisions much faster. More lessons on my experience once campaign is closed out (we just crossed over 100% funded!)
A few examples of platforms with real estate deals:
The bigger the investor, the more formal the investment process is. You probably won’t dig into institutional capital unless you’re needing equity checks of at least $15 million. That usually means total project size >$30-40 million.
Some large family offices will operate in this space, but typically it’s the pension funds, insurance companies, REIT’s, private equity funds, etc. The Blackstones of the world. You don’t just fall into raising institutional capital. You have a track record of success (or someone on your team does), you have relationships, and you know the business.
Incentives & Public Programs
I’ll do a full post in the future on this section, as they are likely the most under-utilized of all funding options and can often be the difference between a viable project and a dud.
These are tax incentives for the investor, but can serve as a new channel of long-term capital for your project if located in an OZ
Local foundations, grants, and case-by-case incentives from municipalities
While there is so much more to say, this is a good start. Aside from going deeper into a few of the areas above, we’ll walk through the capital stack, the painful process of finding the right debt partner (especially in 2020 for non-multifamily deals), what to look for in your deal team & partners like architects, engineers, GC, and lawyers. See you on the flip side.
A Few Things Worth Sharing
Newsletter: Vertical, by Matt Knight (as previously mentioned). Fanatics about Property Technology (#proptech). “This is the future of buildings and that affects our air, water, work life, shopping, apartments, homes and the majority of our daily life.”
Book: The Biggest Bluff by Maria Konnikova. Fascinating story and lessons about decision-making through the eyes of the game of Poker.
Parting Thoughts & Updates
105% Funded! Thanks to all who have invested, it has been an amazing show of support. We’ve still got room for you so if you’ve been on the fence, be sure to become an owner before the campaign closes within the next few weeks!
We also have some great new tenants to announce very soon, I think you’ll love it. Fun to see things coming together.
Lastly, I’m working on a new section of this newsletter that will highlight one “Featured Development” in each issue that is doing things in-line with the Good Neighbors philosophy. What do you think? Any that come to mind?
Until next time, please share this if you enjoyed! See you in a couple weeks, and Happy Thanksgiving!