NOTE: This blog post does not include information about raising capital through banks and financial institutions, which will be covered in later blog post(s).
Raising capital and finding deals are the two foci around which so much of the multifamily industry revolves, and of these two, raising capital is often more challenging but is also a more effective driver of multifamily syndication. Raising capital is a lot easier with you work with a multifamily real estate investment firm. You may be able to find a deal, analyze its potential, and identify it as a very attractive investment, but gathering investments for investors and organizations—raising capital—takes a different set of skills and systems to properly execute. Raising capital can seem like a daunting task, but working hard with a systematized approach can make the process much less intimidating.
Raising Capital and Building Trust
There are three common strategies to raising capital, but all of them stand upon trust. You will need to build your knowledge, experience, and relationships within the multifamily industry. You will need to speak to the methodology and metrics that lead you to pursue a given real estate deal, and you will need to convey the depth of your knowledge of the things that need to happen and the work that needs to be done in order for your investment to be a success.
Raising capital and finding deals are important, but they are just two parts of a much larger system. If your investment strategy involves asset management and/or property management, you will need to educate yourself and gain some experience so that you can speak with authority and build trust with potential investors. If you are speaking with investors, and you don’t have a good answer to questions about deferred maintenance, utilities, legal requirements, the leasing process, or any of the countless small and large-scale issues that could impact your investment plan, then it will be harder for potential investors to trust you with their money. It will be harder for you to raise capital.
The most successful syndicators and capital raisers all have dedicated teams in place to handle the varying aspects of running a multifamily project. From marketing, investor relations, legal, accounting, to property management and construction, it is essential to have the right team in place to maximize your own success.
Gaining Trust through Knowledge and Experience
Fortunately, there are resources that you can use to educate yourself about commercial real estate investment and multifamily investment specifically. If you are passionate about apartment investing, it will not be difficult for you to find and consume the wealth of free information that’s available on the topic. Paid courses and educational programs can offer some additional motivation and the possibility of growing your relationships within the multifamily industry, but ultimately, the work that you do to study and research this topic is your own.
Your study and research can be done independently, but gaining experience is more difficult to do on your own. You may be able to use your existing skills and background to pursue employment within a property management company or real estate investment firm, or you can explore opportunities to partner on a deal with an experienced, trustworthy operator. For more information on this process, our earlier blog post outlines the work that goes into finding the right partner and the things that you can do to attract the right partner who can help you build valuable experience as you are starting out.
Gaining Trust Will Improve Your Odds of Success
Once you are comfortable with your level of knowledge and experience in multifamily real estate investment, it will be much easier for you to pursue strategies for raising capital. Parts of these strategies involve a substantial amount of time and effort, and if you do not know enough or are not experienced enough, the time and effort you spend attracting potential investors could be wasted if they decline to support you due to lack of trust. Raising capital is in many ways a sales process; there are no guarantees that you will be able to raise capital, but building trust and dedicating yourself to a clear capital raising strategy will dramatically improve your odds of finding investors willing to provide the capital for your project.
Three Strategies for Raising Capital
So, once you have done the work and the research, you can begin to raise capital by using your existing network of friends, family, and professional acquaintances, you can build a brand and organization to reach out to investors outside your network, or you can follow a crowdfunding strategy for raising capital. Likely you will be employing a mix of these three, and getting informed on the details of these strategies will help you to decide the most effective approach for your own circumstances and skillset.
Friends, Family, and Connections: The “Country Club” Method
The most straightforward capital raising strategy builds upon the existing level of trust you have with the people that you already know. There is a saying that “your net worth is equal to your network,” and it tends to be surprisingly accurate. If you have a large group of friends who have the means to invest and are open to discussing investment opportunities with you, that can be extremely valuable. If you are looking for investors among people you do not know, (which we will cover below) it takes a lot of work just to get to the point where an investor is willing to speak with you. When you’re dealing with people you already know, you get right to the point.
There may be some within your network who trust you unconditionally, but more likely than not, even your mother is going to need some additional assurance when deciding to support your project with an investment. Yes, you’ve got the requisite understanding and involvement in the multifamily sector, but you need to approach every single interaction with potential investors as the valuable opportunity that it is. This means being prepared. Know your deal inside and out. Be able to explain how and why you arrived at your projected return on investment as well as the financial tools you use to measure and analyze the costs and revenues associated with the property. Be ready with information about comparable multifamily properties in the area, employment information, and population growth. Also be certain in your method of how you will execute the business plan. Will you be self managing? If so be prepared to go into detail about your prior management experience. If you are hiring a third party manager, be prepared to dive into their track record and why you chose them over other options. Whether it’s in your head or (preferably) in a nice-looking slide deck or document, make sure that you are on top of all the relevant information associated with your project.
Attracting Investors Outside Your Network
Looking outside your network takes more work, but this strategy has the most potential for growth. No matter how many people you know, if you want to continue to grow, eventually, you are going to have to look outside your network. For those who may not be able to find any initial investors among their immediate network, you can begin with this strategy and have the tools to establish this scaleable solution from the very beginning. Sharing the details of this approach could easily fill a blog post in itself, but learning about its key aspects and considerations here will give you a good start.
Attracting investors outside your network requires the right mindset the discipline to work systematically to create an image and brand that will motivate people to invest in your project. You can promote yourself, your organization, your project, or a mixture of related ideas, but whatever your chosen focus, you should work to build trust with potential investors and make it easy for them to take action. Call it your passion, calling, purpose, or whatever, your enthusiasm about your project and your investment strategy goes a long way here.
Being able to share what makes you excited about multifamily investment is a very effective way to get potential investors excited. There are many different platforms and strategies for sharing engaging content online, and I use the term “content” to include a number of different ways you can share your ideas: Get involved in social media conversations. Start a website, blog, or podcast. Make videos, dive into BiggerPockets forums, and take note of the content and ideas that are driving conversations.
Making and sharing content will allow you to sharpen your own ideas about what interests people, and continuing to produce this content will start to establish yourself and your organization as a brand. It can help you build an image and identity that both evokes trust and moves them to take action. Taking action is key here. In the country club method where you contact people within your network you can take action yourself to start a conversation with a potential investor, looking outside your network most often means that you will need your potential investor to take the first action. Granted you should not always push for people to give you a call or send you an email, but you do want every piece of content to have a purpose.
Ultimately, you want to evoke trust and motivate action. Establish yourself as a trustworthy source of useful information and ideas, explain your own project(s) in a way that connects with what interests people, and provide an opportunity for people to get more involved and more engaged. If you keep producing content that works towards these goals, you will eventually build an audience of potential investors that are receptive and interested in raising capital. This will not happen all at once, but once you have an established content and branding strategy that works, attracting potential investors and raising capital can be much more dependable.
Crowdfunding your capital raise is a different way of approaching potential investors outside your network. Crowdfunding can be advantageous in that you may not have to build an entire system dedicated to cultivating relationships and building a trustworthy image and brand. The drawback is that you will have less control over how you interact with potential investors, and the pool of these individuals is often limited to those people who are already involved in the crowdfunding organization.
Before you decide upon a specific crowdfunding platform, you need to do your research. There are a LOT of options out there, but fortunately, there are many different websites that review these platforms. CrowdStreet, PeerStreet, EquityMultiple, ArborCrowd, and Real Crowd are all reputable crowdfunding platforms currently, but you will also need to select a service that matches your project and the kinds of investors you would like to attract. Each platform has different features, different minimum investment levels, different kinds of property and deals that they specialize in, and different histories.
Keep in mind that the crowdfunding platform will almost certainly assess the details and feasibility of your project as well as yourself and your firm. These organizations are looking out for the best interests of the investors that sign up for their platforms, so using their services to raise capital for your real estate venture is not automatic. Crowdfunding does not take trust out of the picture, but if your potential deal has sound fundamentals, a reputable platform can make it easier for investors to place their trust in your project. There is less need to build a robust brand and image in this case because your project can utilize the investors’ trust in the platform itself. If your deal is approved and listed on a crowdfunding platform, you will benefit from the greater visibility and access to investors that the platform makes available.
Raising capital takes some effort, but fortunately, there are many ways to do it. If you have a solid plan and are committed to doing the work to secure capital for your investments, your project will move forward. If you are interested in more information on multifamily investments, our blog has posts explaining important concepts, metrics, and information, updated regularly. For a weekly newsletter on current trends and developments in the multifamily industry, click the button below to sign up for our free Gray Report.