Overcoming the Fear of Raising Private Money as a New Investor

0:00Something to keep in mind is the biggest mistake that real estate investors out there make, new or experienced, bigname people on TV, all the things, is they go straight to the deal. They go straight to the numbers. — If raising private money is rapport-based lending, the last thing we want to do is go straight to the deal. Now, sometimes they do this because they're desperate, and other times they do it because they're excited, right? But either way, we don't ever talk about the numbers until at best the third meeting.

0:32And so for step two of how I teach people to raise private money, when you get them on the phone, first of all, you want to call them. You told them, "I'll give you a call next week." So by actually calling them a few days later, you're starting to fulfill on that promise. You're starting to build rapport and trust without them even knowing it. And really, you just be be a normal person. Don't overthink it. Hey, it was so great meeting you. Thank you for your time. You know, if you're brand new, just say, "Hey, we're currently on target to complete three transactions this year." and really, they're all funded with other people's money.

1:07And so, the purpose of today is to, you know, just understand like, have you done this before? Here's why I raise money. Here's why lenders love lending us money. And that's it. It's literally what's in it for you and what's in it for them, you know? And so, I just wanted to break it down at a really high level. And if it's something that may seem of interest, not even for you, but maybe for your network because I also pay finders fees, just let me know and we can hop on a 30 minute Zoom and I'll just break down the next level and we'll just take it from there. So really that first phone call is you just vetting them. Are they like serious?

1:39Do I vibe with them? Because you guys, it doesn't matter how deep their pock pockets are. If you don't vibe with somebody, then don't work with them. You don't need them that, you know, it's like this is something we're doing. Yeah, it's like you want this to be fun. And believe it or not, even for many of you who are brand new, like and I remember one of my mentors telling telling me this actually, we were at Tavern on Rush. And he was like, "Amy, you're so funny. You've never raised money. It's like Monopoly. You're just it's going to turn into a game." And I was like, "Lou, you are so crazy.

2:12Like, there's no way." But it's true. You know, like once you start doing it, you see results. You get confident and you guys are going to start raising money in your sleep. You're not going to even realize it's happening. But we have to start talking about it. We have to start calling people and have some sort of an organized system to like educate them slowly on the different moving parts in our business. — Yeah, that that totally makes sense. And I I clearly remember laying awake at night after raising my first, you know, deal, money for my first deal.

2:45And it was from friends and family that kind of just said they were they they heard what I had been doing. And they they identified themselves as, hey, I would love to, you know, be a part of a deal that you're doing, but I was brand new. And I was laying there thinking, man, if this goes sideways, like I don't know what I'm gonna I like I was so freaked out. But then to your point, like you realize, okay, — if you're picking smart deals, like they're in a really secured position, like, — right, — you know, it's it's very you know, things can go unplanned, but it's not like, you know, they're going to hand you a check and then tomorrow it goes to zero or something like you know, a risky crypto investment or something like that.

3:28So, it's very different. And you get used to it and it just grows from there. But so okay so that's step two and then you said on the third conversation that's when you start to kind of get into the details of the actual deal. — Yeah. So it'll be like the third formal meeting where it'll go into like the numbers. So basically we've had our like planting the seed. That's the first touch point. The second touch point is literally like a five or 10 minute phone call. That's it. So then the third touch point is the first formal meeting. So, on that first formal meeting, if they're local, you guys go schedule a 30-minute coffee talk.

4:02And that's really important because a lot of the time you will vibe with the person you're talking to and then you're going to get stuck having coffee for 90 minutes. You guys, you got work to do, right? So, 30 minutes, hold yourself accountable, rotate them in and out. And that's where you will take them through a very short highlevel presentation. Just print it out. You don't need your laptop. And that's where it goes into the detail of what's in it for us. You know, I need cash to be competitive and close quickly.

4:36It's how I can buy these non-conforming properties. If you're buying short-term rentals with mold or non-functional plumbing, well, you can't go get a loan from a bank, right? They won't lend on those deals. But then continuing, I also don't work with banks because it takes them forever. They have a stack of paperwork. They can't close fast. And then you shift into what's in it for you, but in greater detail. Because on the phone you just like danced over the topic, right? But we'll always give you a promisory note, a recorded mortgage. We'll add you to our insurance policy.

5:08Our goal is for this to be long-term, not transactional. We want to create these win-win situations. So, for me, I still pay 12%. So, I tell them that they're high rates of return. They're fixed. So you can always predict how much interest income you're going to earn every year. We have this red carpet VIP treatment process. So you just go into the details of what's in it for you and what's in it for them. And then the next meeting is where you'll start to break down maybe the contracts. And all you do is focus 30 minutes on these are the contracts we use or maybe depending on where the conversation left off instead of going over contracts.

5:47So So now I'm going through like credibility pieces, right? You want you want to have a bunch of different like presentations or talk points so that you don't overwhelm your audience. So maybe it's contracts for one meeting. Maybe one meeting is a private money brochure that you have. Maybe one meeting is just your org chart. You're just showing them who your power team is. That's it. And then at some point, yes, the third in-person meeting can be your deal analyzer. So, whatever deal analyzer you use, you just show them, hey, look at how conservative I am in my underwriting process.

6:21I've taken into account every single cost variable. Show them your projected profit. If you're raising money for short-term rentals, which I do as well, you know, I have a different process there. I I will raise money at 10 to 12%. I will make quarterly interest payments. We do offer to fly our investors out once a year. We let them stay at the property for three nights as a bonus. And so it's starting to break those down. But one conversation is always just focused on the deal.

6:54And when they see how much projected profit you're going to make, not once in 14 years of me investing have they been like, "You're going to make 50 grand. I want more than 12%." It just builds more confidence in them that you know what you're doing, right? Like show them how you run the data, where the comps come from, why your realtor's so amazing. — and then what happens is when you follow the system, — by the fifth or sixth meeting, that's when they're like, "Cool, Kirby, take my money." Right? So, you either get the hard commitment or the soft commitment. And then I'll pause in case you want to Yeah.

7:27— ask any questions. — Yeah. A couple come up because one of the most common ones that I get because it's not we're typically not doing flips and burrs, you know, where it's like quick in and out. We're borrowing for a longer period of time until we refinance for that gap funding. — and and that's what we've done. That's what a lot of the members of my program have done. And so what what's your recommendation around the the length of time initially to ask for? — yeah.

7:59So, I'm like one year, you guys. Like, if you want to get you can go if you've never raised money before, I would say get a one-year commitment. No more than two for sure because at the end of the day, when you're finding good short-term rentals or whatever, turnkey rentals, if if that's what you're doing, and you have a great deal, it'll be easy for that person to see after one year that you're staying true to your word, you're delivering results. The property is generating income and they'll just renew their loan and there's no fee, you know, for them or for you to pay them to do that.

8:35I just feel like it's going to be harder, not impossible to get a two-year commitment, especially in today's market. So, I still like raising all my money on one-year notes regardless of the investment strategy. — Yeah. Yeah. I'm the same way. I I feel like and I've had since you know starting like 15 years ago I've had maybe one person I think they I had one person whose like kid was going to college and they were like okay you know I need my money back. — Yeah. The rest like have been mad when I've paid them back.

9:07You know, they're like, — you know, monthly or quarterly distributions and they're like, "Yeah, keep it rolling." Like, "No, I do not want this money sitting in my account because it's long-term, you know, investments for me that that I just want to grow." So, — So, are your students buying turnkey, short-term rentals, or are they putting a little bit of money into them to fix them up? — Mostly, my recommendation is is mostly turnkey. We we focus primarily on, you know, smaller multi-unit properties that that have really high cash flow.

9:40When you have, you know, three, four short-term rental units in the same property and it's a relatively affordable area. — So, you know, there's still even after the DSCR loan and the GAP funding, the private money, there's still a few thousand usually left over of of cash flow on a monthly basis. — so that's cool cuz that's exa So that's exactly what I do here in Austin. So I buy short-term rentals. I turn them into luxury short-term rentals and we still use private money.

10:11We still secure them in second and third lean. We do these quarterly interest payments. And then at the end of every year before I pay myself, I'll just start to chip away at the private money lenders principal. Right, reducing the interest payments and building more equity in the deal. And at some point the property is going to appreciate. So you probably teach them, right? That's when they do the cash out refi. So — Yeah. And what do you see for that typically, you know, and how long somebody should expect to to be able to refinance out the private money?

10:43— Yeah. Oh, to refinance out the private money. I've never refinanced out 100%. At best I still have about 50% of their principal into each of my deals. Yeah, but these are also, you know, if you could do a little bit of maybe overtime renovation and force more of the appreciation, then you'll get more money back when you do that cash out refi. But I've really the actually there were a couple of deals where when I did the cash out refi, I got back like 75% of their principal.

11:19And so I paid that down and then I still never pocketed anything until I was able to actually no I did have some deals in Phoenix where I paid them back first. It was a really anomaly of a high performing deal which wasn't normal. Paid them back first before I pocketed anything. So I did that a couple of times. — Got it. Yeah. Yeah. Because you're always going to be paying down the principal on the first loan. It will appreciate over time. Eventually, you know, interest rates will be favorable enough to, you know, you to to where you want to refinance. So yeah, you can't predict that, but as long as it cash flows from day one with both loans in place, that's what I always say, like don't buy something with negative cash flow because you're like, well, I'm going to refinance next year and get all this private money paid back and — that's a dangerous position to be in.

12:05So, — and you're doing a dissert I mean you won't be able to raise the money because if you're showing if you're an open book and you're showing your private money lenders the deal they're going to be like that's not a deal right and it becomes risky — but — so so when you get to that point then where they're like okay I want to make the investment what you mentioned usually a promisory note and mortgage how complex is that you know what do you recommend And in terms of you know the agreements that that you should sign.

12:39— So there are three basic ones. And there are some exceptions you may want to make if you're comfortable. Always a promisory note that something you can get from a real estate attorney or a title company just summarizes what you guys have agreed to. Number two is always add your private money lender as a beneficiary, your loss payee to like your landlord policy, your builder's risk policy, whatever you're doing. Doesn't cost you anything. Just email your insurance agent. They'll add your lender's name to it and send them a copy so they have it.

13:12And I always create a shared Google Drive folder and I just share everything with them so they have access to it real time. And then the third thing is that recorded mortgage or deed of trust. And that's why I like working with like hard money or DSCR loans on these long-term holds is because there aren't many, but there are some hard money lenders that will allow you to record a second lean behind them. So, they still get that tangible asset, right?

13:43— If you're working with banks or most hard money lenders, they don't allow second lean. So, you have to decide, will I secure their investment against another property, against my primary residence? Maybe you secure it with a personal guarantee. I've done all of the above. You just have to understand, and of course, talk to your legal team on how that exposes you. If you do sign a personal guarantee, for example. But those are the three basic contracts that you'll always use. And the personal guarantee is a optional fourth one. — Got it.

14:14Okay. Yeah, that makes sense. And then so then going forward, so you line up money for a deal. What are the steps that you do, I guess, in between needing capital? I know you mentioned you're you're always kind of introducing yourself certain way like is there are you sending out emails regularly or what do you recommend to someone just to stay top of mind? Yeah. So, I have an entire follow-up system. And so, basically what I'm taking you guys through, and I never shared it earlier, is this fact framework.

14:47It's this framework where we build our foundation first. We get organized. We understand what we're doing. And then the A is where we're taking action. So, that's where the 4 secondond power pitch, the meetings, all the things, right? And then step three, the C, the credibility pieces. Those are your talking points, contracts, all the things. And now to your point, Kirby, this the four step are T, the transactions. And so we want those transactions to continue to come in whether you have a deal or not. So we want to stay in front of our audience through a monthly or bimonthly newsletter. Depends on how much business you're doing.

15:19We want to have a list of like I have a short list of my top 10 private money lenders where every quarter I just call them and I don't talk about work. I just how's the family? What have you been up to? Sounds goodbye. I have random things like a a list of 20 things that I'll just send them on occasion. I'll frame a picture of a distressed property and just mail it to them so they can leave it on their desk and serve as a reminder on new opportunities in the future.

15:51Depending on what point of the relationship you're at, you will send a text message letting them know of new deals. You will have a buy monthly email campaign going. And so like for me, I keep them short and sweet with my private money lenders. And basically every email is just a paragraph of why now is a good time to be a private money lender. Or maybe I'll cover a frequently asked question. So there's a lot you want to do to like stay top of mind, especially if you don't have a deal.

16:24And if you do have a deal though, like what I started doing was if I knew I was locking up deals every 30 days, I would take the money once they were ready and I would start to acrue the interest because I knew I I would have deal flow to deploy it. — If you don't, then don't take the money, but let's continue to nurture them until you do have a deal. — Yeah. Yeah, that's a good point. Like just because you're not going to close for a few months, you're like, "Oh, I don't want to pay the interest." Well, I mean, getting a if you have an amazing deal, — paying a couple months extra interest is worth it just to ensure that the money is sitting there.

16:58Yeah. — Yeah, they appreciate that, too. — yeah. And and and look, of course, during that time, there's, you know, there's more risk because you don't have the property. There's not that recorded mortgage. But these are all things where you will have covered these hypothetical what if scenarios well before your lender ever sends you the money, you know, and you just tell them. I mean, on my very first meeting in a kind way, I'm like, look, you guys, if this is taking food off the table, then this may not be a good fit right now.

17:31Or I can't guarantee you anything. Even if I sign a personal guarantee, what if something happens and I have no personal assets? Right? So, my goal, and this is true, really is to pay you back out of pocket. But worst case scenario, you have to be okay never seeing your $50,000 again. — Wow. — right. But I don't say it to scare them. I'm just over disclaiming like it's a reality. It can happen. I record all these meetings, you guys. I put them in their Google Drive folder. Not because I want to fingerpoint later.

18:03That's actually never happened. But it's more so they can go back, watch it, show their husband or wife or their partners, come up with more questions. So, again, it's my way of building that rapport and trust. — Yeah. — — No, that's Yeah. And and it also — probably screens out the ones who are going to call you every day and say, "Hey, you how's that project going?" Like, you know, am I when when am I going to get paid? Like, you know, that are freaking out, which is probably not the ideal type of private lender, — like Phil from Florida.

18:37I wish I would have kept the voicemail. And that's a great example of someone you don't want to work with. The minute I had his money, I'm not kidding, four times a day he was calling me. This is actually good story, guys. So, businessman, very successful, lived in Florida, totally got it. I took him through my entire process. A couple months passed. I found this amazing deal in Oak Park and I called him on a Friday. I was like, "All right, Phil. The investment's 235." He said, "Great. Send me your wire instructions." I did for a second think that was weird, but then I'm like, "Why though?

19:11I've taken him through everything, right? He gets it. I got the money on Monday. Every day he called me multiple times. And on day 10 or 11, I see him calling. I'm in my condo in Chicago. The property was four miles away. I look at it, let it go to voicemail. One or two days later, I called him. His voicemail said, "Amy, I am here at the property and we have a lot to discuss. I need you to meet me here like now." I deleted it, called him back the next day and then I became passive aggressive.

19:44You guys, I have a very spidey side, FYI. I was like, "Phil, oh my good, did I miss a meeting? I didn't know you were here." So, what that means is he flew in unannounced on his private jet, went to the job site, and all he had to say was, "Did you know your taxes are delinquent?" Yes, I did. That's a part of my process. I don't pay taxes until closing. So, I will pay the $100 penalty. — Yeah. — And take care of taxes at closing. But the reason I share that is because this was 14 days in. So, I told him, I said, "You know what, Phil?

20:15I don't think this is going to work. Send me your wire instructions." I sent it back as principal, 14 days of interest, and that was it. So, to your point, Kirby, you guys got to make sure that your lenders know they are silent stakeholders. They will not call you. You will send them monthly updates whether you're behind schedule or not, and then that's it. If there's something critical going on, fine. They can call you, but other than that, they just get to kick back and relax while you do all the work. Oh.