If you spend any amount of time around me, you will know that I’m a pretty positive kind of guy. I don’t like to dwell on the negative, and instead focus on whatever positives I can extract from a situation. I think that a positive mindset is an important factor to becoming successful.
Even so, there is one case where it makes a lot of sense to dwell on the negative: you should study the mistakes other people have made. To be very honest with you, if you’re a real estate investor, it’s inevitable that you’ll make your own share of mistakes. That’s true about learning any skill. And it’s great to learn from those mistakes and move on. But here’s the real secret: you don’t have to make all the mistakes yourself! There is no virtue in that. Instead, smart people take every opportunity to stand on the shoulders of others, so to speak, by learning from the mistakes others made.
Therefore you’re in luck today: in this article you will hear about seven mistakes that real estate investors make when it comes to funding their deals with private money.
In case you’re new to real estate investing, the term “private money” means funds you get from individuals, as opposed to the conventional approach of going to a bank or other lending institution to take out a loan. Private money can come from family members, friends, business associates, or even complete strangers who hear about your real estate opportunity and want to make a good return on some of their investment dollars.
Real Estate Investing Mistake #1: Not looking for money soon enough
This is an extremely common mistake, because it seems to be the logical thing to do. The reasoning goes like this:
“I can’t talk with investors until I have a deal! After all, they’re going to want to know the details of any investment that they get into.”
That sounds reasonable but here’s the thing: when a good property comes around, it often is not available for long. If you start to cultivate investors only after you know about the deal, two bad things could happen:
- You make the investors feel rushed because the clock really is ticking on that deal. Rushed investors will be displeased at the very least, and will most likely back away. Nobody likes feeling rushed, especially when significant dollars are at stake.
- You lose the deal, because you could not act quickly enough.
There’s a saying in sales: “ABC stands for Always Be Closing.” In real estate investing, it should be “ABRM” or “Always Be Raising Money.” That means whenever you’re talking with people about what you do, you casually mention that you’re a real estate investor and from time to time you come across very solid investments. If someone would like to hear about the next one—whenever that may be—you’d be happy to let them know. It doesn’t come across as a hard sell, or really selling of any type.
In fact, not having a deal at the moment can work in your favor because it takes the pressure off the conversation. The implication is that you’re not in any rush, and that you’re very choosy about the sort of deal that meets your standards.
Real Estate Investing Mistake #2: Asking for money
“Huh?”, you may ask. How can asking for money be a mistake when you’re looking for money? It’s all about putting yourself in the shoes of potential investors. It’s common for people who have money to be pitched all the time. As a result, they’ve gotten very good at saying NO.
I remember how much I dreaded having to pitch people. Sometimes I’d rev myself up, dress up, and go to some event where I could network and do my pitch for money. One time I drove all the way to an event and pulled into the parking lot. I turned off the car, and sat there, thinking: Should I go in? Come on, Dave! Of course you should! You drove all this way to meet these people! And just think of how good it will be to get your property funded at last! Just get out of the damn car and get your butt into that event, and do the pitch, OK? How bad could it be, after all! It’s not like they’re going to take a swing at you! Go for it!
So I hesitated. Then I made up my mind that I’d do what any self-respecting adult would do in this situation.
I started up the car and drove home.
It was just too painful to go in! But get this: just a short while later, I would routinely go into such events without the slightest anxiety. Not only that, but my confidence showed and as a result, I found it easy to raise money for my deals. What was the radical, life-altering change?
My first secret-weapon was this: I stopped pitching. Now when I go to events, I just let normal conversations happen. Sooner or later, someone will say: “What do you do?” That’s when I pull out my second secret weapon, in the form of five words. I say:
“I’m an emerging-markets investor.”
That’s it. Then the conversation naturally unfolds. They say: “Oh? What’s that?” and I explain about how there are these hidden markets waiting to move to the next stage of growth, and how I sometimes identify properties to take advantage of that growth. Zero pitching. Zero stress for either side. Just a conversation.
People do not like to be sold, but they do like to buy. It’s all about the approach. So when I say those five words, they generate curiosity and make it easy for the other person to ask a question. Now it is just a conversation around what these emerging markets are all about.
Naturally, some people don’t have money, or aren’t interested in real estate. In that case the conversation quickly moves on to other topics, and that’s fine. But the people who can invest and are interested will sort themselves out from the rest, and we’ll have a good chat. This simple mindset change made all the difference for me.
Real Estate Investing Mistake #3: Not knowing the rules
In some situations it may make sense to go after bank financing, in which case you’re playing by the bank’s rules. They have forms and questions, which you fill out in detail. Then they decide to fund or not fund your deal.
The situation is different with private investors. Many of them are not experienced at doing real estate deals. In that case, you have to play by the rules that the state and federal authorities set up for how these private investments must work.
It’s way beyond the scope of this article to describe all the rules, so I’m not going to try. However, I want to give you a heads-up about a couple of big red flags.
The first is about when you get specific with someone concerning the deal you want to get financed. It’s one thing to say that you’re an emerging-markets investor and from time to time you have projects that investors can be a part of. It’s quite another to talk about a specific property that you’re trying to fund. Do NOT talk about specific properties casually! You MUST follow rules about WHEN you disclose any property details to any potential investors.
The second red flag is WHAT you mention to a potential investor, even when you follow the rules about when you can discuss a specific property. It’s very tempting to do a bit of promotion and discuss rates of return that your analysis indicates are likely. Don’t do it. Let the written materials do the work about discussing the property, after you give those materials to the potential investor.
The rules are really not that bad, once you get to know them. But you do need to know them well, or else this form of raising capital is not for you.
Real Estate Investing Mistake #4: Not knowing your property
At some point it will become appropriate for you to get specific with potential investors about a property. This is when you need to know your stuff, or else you will spook your potential investors.
To some extent, a private investment transaction comes down to investors having a level of confidence in you. They rarely want to know a ton about all the details of a property. Instead, they ask a few questions about the property, but mainly want to be confident that YOU have done your homework—also known as “due diligence”—on that property, and you’re very familiar with it.
That means you should be able to discuss the neighborhood, town, and region. You should know the key numbers relating to why this is such a good investment, and how it compares to other properties. Your answers should indicate how you’ve done your homework thoroughly.
It will take some work on your part to become very familiar with the property. That’s the price of playing this game. It’s a wonderful profession and it can be highly lucrative for you—but it IS a profession and that means you as a professional must be impressive in your command of the property details. That brings us to the next mistake.
Real Estate Investing Mistake #5: Not polishing your presentation
Think about just how lucrative apartment investing can be: it’s possible to use other people’s money to buy an investment that will pay you significant sums every month, without your doing the daily management of that property.
The price of admission to this exclusive club is that you need to get very good at knowing your property, and knowing the way to speak with potential investors. It can quite literally be worth a million dollars to you to get great at this skill, so treat it with that appropriate level of care and attention.
Imagine being a professional actor, where you are expected to know your lines and say them to your audience when the time comes. In a sense, that’s what you are doing when you raise private money. You need to know your stuff.
Don’t get me wrong: I am not saying that you should pretend or act in some way that is not realistic. You must be completely truthful. But you must also convey confidence and knowledge, and doing that requires practice.
Look upon this practice as very highly paid work. When you get good at knowing your properties, and saying the right things at the right time, you’ll be handsomely rewarded. You move your mouth and people write you checks. It’s worth the effort.
But it IS effort. When you’re learning how this profession works, it’s smart to realize that you’ll need to practice what you say. Therefore think about ways you can practice in front of supportive people you know, where the stakes are low. (Note that I didn’t say “friends and family” but “supportive people”. Sometimes the people closest to you are not supportive, and may actively sabotage your dreams. So choose your audience carefully.)
Another tip: don’t just “go for it” and talk up the wealthiest person you know, right from the beginning. Do what experienced theatre companies do: first learn what you want to say; then have some dress rehearsals among supportive people. Then take your performance to a real-life, off-broadway situation that’s not likely to result in much attention or money. You don’t want money at this stage; you want experience. Only after you feel like you’re really getting the hang of this should you think about using it with your best potential investors.
By the way, keep in mind that this is not the World Series Game 7, OK? You get to take as many swings as you need and striking out is fine. You just need to connect once in a while.
Real Estate Investing Mistake #6: Not following up
This one is super-easy, super-important…and very few people do it! Let’s say you do all of the above and you end up having a really productive conversation with someone. Great! You have her contact information and you agree to stay in touch.
Except you don’t.
Maybe you meant to stay in touch, but you lost her card. Or you wrote a sticky note but it got buried under ten other sticky notes on your monitor.
You must fix this stuff—now. Treat the leads like little gold vegetables you have to carefully cultivate. That means not killing them with overwatering (over-contacting people) or killing them through neglect. Just do a little bit of steady cultivating, and they’ll produce a bounty of gold for you.
Real Estate Investing Mistake #7: Not being organized
I just alluded to this one above, where you have sticky notes for important things. Even if you’re starting your real estate investing business while you’re working full-time, treat it the way a professional would. Take the time to make notes, and put important reminders in your online calendar. Set aside a little bit of time each week to study, do some marketing, stay organized, and follow up.
Just remember: you are doing what others won’t do. You’re building your business while they don’t feel like it, or don’t know how, or have a hundred other excuses for not taking action. Pretty soon, you’ll be able to do what they cannot do: you’ll benefit from monthly passive income, and appreciating assets. Slow, steady work on the right systems is the price of admission to this exclusive club. You’re invited to join the club. Will you pay that price?