Finish this sentence: “I’d like to invest in real estate, but ____________.”
If you said, “I don’t have the money,” bestselling author and internationally recognized real estate expert Russ Whitney has the solution.
“There is no question that it takes money to invest in real estate,” says Whitney. “But keep in mind that it doesn’t have to be your money. If you have a good deal, you’ll find the funding.”
Whitney, who is the CEO of Whitney Education Group, Inc. and author of several bestselling books including Millionaire Real Estate Mentor (Dearborn Trade Press), The Millionaire Real Estate Mindset (Doubleday), and the revised Building Wealth (Simon & Schuster), says that simple partnerships are a great way to invest in real estate.
“There are plenty of people who would like to invest in real estate, but they don’t know how and they don’t really want to take the time to learn or to do the work,” Whitney says. “If you bring them a good deal and present it well, they’ll be happy to use their cash and/or credit to fund the deal, let you do the work, and you split the profits.”
Think you don’t know anyone who has enough money? Think again. You probably know dozens of people who have money in retirement accounts and who would like to see that money earning a higher yield than mutual funds provide. Many high-income professionals—doctors, lawyers, accountants, engineers—are looking for strong investments that will provide a level of long-term security their jobs do not. Whitney says that if you’re shy about asking these people to invest in your project, use an indirect approach. Simply tell them you have a great deal, you’re looking for a partner, and if they know of anyone to please pass the name along. If they’re interested, they’ll ask questions—and if you have the right answers, you’ll have your funding.
According to Whitney, the key to successful partnerships is a clear and comprehensive written agreement. “You want to clearly state who is responsible for what, who has the authority to do what, and how the profits will be divided and paid,” says Whitney.
A more sophisticated approach to funding is syndication. While the term might sound complicated, Whitney points out that it really is nothing more than bringing together a group of investors to accomplish a common venture. “Syndications build on the principle of strength in numbers,” says Whitney. Keep in mind that some types of syndications and other methods of raising money from outside investors are regulated by state and federal governments, so you should discuss your plans with an attorney before proceeding.
The key to successful syndications is preparation. Whitney advises creating a comprehensive business plan for the project before you approach any potential investors. “You need to demonstrate that you know what you’re doing, that you’ve considered all the risks, and that you know what the rewards are likely to be,” Whitney says. “The plan should spell out who is going to be passive and who is going to be active in the venture, as well as how and when the profits will be distributed.” You don’t need an investor you expected to be passive jumping in and trying to run the show—and you don’t need an investor saying “where’s my money?” six months into a two-year project. A clear business plan and syndication agreement will help prevent that.
Getting your first partner will likely be the most challenging, but once you do a deal and the partner makes a profit, you’ll have no trouble finding other investors for your partnerships and syndications. “When you make your investors money, they’ll be lining up to give you cash for another deal, and they’ll tell everybody they know about what you did for them,” Whitney says. “The best way to find investors is to satisfy the ones you have.”
A business plan for a development project should include:
- An executive summary that captures the essence of the project.
- An overview of the project that provides a detailed description of the market opportunity, the financial objectives, the legal form of organization and ownership, the management team, the financing basis, and timetable.
- A detailed marketing plan.
- A comprehensive financial plan that includes all appropriate financial information so investors can make an informed decision.
- Any necessary supplemental documents, including tax reporting requirements, risk identification, employee-related regulations, licenses, taxes, zoning, reporting requirements, etc.