Private capital can be a game-changer for real estate investors. In this post, we dive deep into the ins and outs of raising private capital, guided by Troy Fullwood, a seasoned expert with over 23 years in the note business. From understanding lien positions to crafting a compelling business plan, we’ve got you covered. Let’s walk through the process step by step to help you fund your next big deal.
Introducing Troy Fullwood
Troy Fullwood is a name that commands respect in the world of real estate notes. With 23 years of experience and over 15,000 note transactions under his belt, he knows the industry inside out. Troy’s niche is real estate notes—both first lien performing and non-performing residential notes, spread across the nation. He stepped into this field because he found traditional fix-and-flip models limiting. Rather than hunting for nuts and bolts at Home Depot, he aimed to emulate the more sophisticated financial plays of banks, and the rest, as they say, is history.
What is a Lien Position?
A lien position is a crucial term in real estate and note investing. It defines your place in line when it comes to claiming rights to a property. The first lien position, often called the “golden position,” is the most coveted because it has the highest priority over other claims.
For example, if you hold the first lien on a property, your claim will be satisfied before any second or third liens if the property is sold. This makes the first lien position a safer and more attractive investment.
Defining Private Capital
Private capital refers to funds held by individuals in accounts they control, such as 401ks, savings accounts, or money market accounts. Unlike institutional capital, which comes from entities like banks or hedge funds, private capital has its limitations.
- Private Capital: It’s easier to obtain but comes with emotions and restrictions. Investors might have specific conditions on how their money can be used.
- Institutional Capital: Virtually unlimited and primarily focused on lending. Banks and institutions are in the business of lending money, making it a more stable and accessible source for large-scale investments.
Raising Private Capital
Raising private capital typically follows a straightforward process, especially for smaller deals like fix-and-flips. Here’s how it often goes:
- Present the Deal: Show what the deal is about, including expected returns and risk factors.
- Numbers and Terms: Lay out the financial details clearly.
- Personal Relationships: Leverage your existing relationships to secure the funds needed.
For scaling up to larger deals, having a structured business plan becomes essential.
Step 1: Building a Business Plan
A solid business plan is your blueprint for success. Here’s what you need:
- Goals and Objectives: Clearly state what you aim to achieve.
- Current Industry Conditions: Provide context about the market landscape.
- Team and Case Studies: Highlight your team’s qualifications and past successes.
Include supporting documentation like industry reports or case studies to lend credibility to your plan. You can even use tools like Fiverr to create professional-looking documents tailored to your needs.
Executive Summary and Pitch Decks
Once your business plan is ready, you’ll need to condense it into an executive summary or pitch deck. This should be no longer than two or three pages. Here’s what to include:
- Summary of Your Business Plan: A high-level overview of what you aim to achieve.
- Current Market Conditions: Relevant data and trends.
- Team and Experience: Quick bios and past successes.
A well-crafted executive summary respects investors’ time and gets straight to the point, increasing your chances of securing a meeting.
Researching Institutional Investors
Finding the right investors is half the battle. Use family office databases, like FamilyOffice.com, to search for potential partners. Here’s how to do it:
- Buy the Database: It’s worth the investment.
- Screen for Niche Fit: Make sure the investors are interested in your specific market.
- Other Research Methods: Use LinkedIn and other platforms to gather more information about your potential investors.
Initial Investor Outreach
Now that you’ve identified potential investors, it’s time to reach out. Here’s how to do it effectively:
- Personalized Email: Tailor your message to each investor.
- Professional Email Signature: Include all your contact details.
- Possible Video Introduction: A short video can make your pitch more engaging and memorable.
Building Relationships
Building relationships is crucial for long-term success. Here’s how you can make a lasting impression:
- Attitude and Gratitude: Send thank-you notes and small gifts.
- Personal Touches: Learn about your investors’ interests and find ways to connect.
- Understanding Investor Interests: Align your proposals with what they care about most.
The 15-Minute Call
Once an investor shows interest, they might agree to a short call. Here’s how to make it count:
- Set Expectations: Be clear about what you hope to achieve in the call.
- Let Them Lead: Allow the investor to ask questions and guide the conversation.
- Determine Fit and Interest: Use this opportunity to gauge whether you’re a good match.
Next Steps if Interested
If the call goes well, you’re moving into more serious territory. Here’s what happens next:
- Meetings: Expect to have in-depth meetings.
- Due Diligence Process: Be prepared to share more detailed information.
- Potential Deal Structuring: Work on structuring the deal to meet both parties’ needs.
- Modifying Plans if Needed: Be flexible enough to adjust your plans based on feedback.
Pros and Cons of Institutional vs Private Capital
Each source of capital has its benefits and drawbacks:
- Access and Scalability: Institutional capital offers more significant opportunities but requires more rigorous processes.
- Potential Barriers to Entry: Institutional investors have strict criteria, so getting your foot in the door can be challenging.
Raising Capital for Troy’s Firm
Troy is currently raising capital for a $100 million firm focused on real estate technology for realtors. His process involves:
- Retainer Basis: He works on a retainer and gets a share of the company.
- Step-by-Step Process: His thorough approach ensures all bases are covered before securing funds.
Tips and Final Advice
Here are Troy’s final tips for anyone looking to raise capital:
- Think Big: Don’t be afraid to aim high.
- Level Up: Force yourself to operate on a higher level.
- Value Relationships: Numbers are important, but relationships are the key to success.
Raising private capital might seem daunting, but with a structured approach and the right mindset, you can unlock opportunities you never thought possible. Take these tips to heart, and you’ll be well on your way to securing the funds you need for your next big real estate venture.
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