Raising capital to do real estate deals was one of the hardest things that I had to learn. In fact, I didn’t even know where to start! Some of you may feel the same way that I did. Where do I get the money to do Real Estate? Is it possible for me to “save” enough so I can put a down payment on my next real estate deal? Well, I’m going to introduce you to 6 steps in raising millions of dollars for doing real estate deals. These 6 steps are not an original idea of mine. Rather, I was taught and mentored by two distinct gentlemen named Kendall Stock and Darren Davis. Kendall and Darren are actually due for a reality TV show of their own! I had the honor and privilege of learning from them! Just as any good steward, I’m going to share this knowledge with you, right now!
Just to give you a brief overview, here is a couple of things that you must know. There are near $30+ trillion dollars in the retirement funds across the country. Most retirement accounts are generating only about 4-5% annualized return every year. Not bad, but it’s too slow. In real estate investing, investors can generate an upwards of 12-30% return every year. Now, this is a conservative set of percentages that I’ve given you. I’ve seen higher. We’re going to tap into the same $30+ trillion dollars worth of resource as a way to raise capital for real estate deals. What if, as real estate investors, can help our neighbors, friends, family or even acquaintances by getting them 12%+ returns on their retirement account? You might be saying, “You can’t do that! You can only buy stocks, bonds and mutual funds with retirement account!” Not True! You can invest in anything that is allowable by law. I even know a friend that buys Superbowl tickets with his retirement account and sells it for a higher price when Superbowl is near. The big corporate retirement account custodians have sold you on the idea that stocks, bonds, and mutual funds are the best investments option. They sold you on this idea because that’s how they make money! They don’t care if you lose or gain money. They’ll just blame it on the market and “apologize” that they couldn’t do anything about it.
We’re going to do some justice to the hundreds or perhaps even thousands of people who desperately wants a better return on their retirement account. To do this, the six steps that I’m going to share with you is a simple way to raise capital. Now, before you try any of those steps, I highly recommend that you get some education on real estate investing. If you mess up or slip on a deal, there’s no way of crawling back out. Even more, if you break any laws because you weren’t aware of potential legal ramification, then you will owe fine and possible jail time. So before you attempt to try investing on your own, I want you to, first, work with an attorney. Second, I want you to consider a possibility of getting some training from me and my team of experts: www.student2investor.com
Step 1. Talk To Potential Investors (The Ask)
Your potential investors can be anyone but your parents, children or even your grandparent. When it comes to using other people’s retirement accounts, you cannot mess with your parents, kids or grandparent’s retirement accounts. It’s considered a prohibited transaction as prescribed by the law. Anyone who is vertically related to you, you cannot solicit funds from their retirement account. If they invest with cash or a non-retirement account, then that’s a different story. But your potential investors can be uncles, nephews, friends, colleagues, your neighbor, your pastor, or even your boss. It’s whoever and anyone who is interested in getting a better rate of return on their retirement. (Which happens to be the majority)
The first thing you do with your potential investors is to ask the right questions. Here’s an example script that you can use to start a conversation.
“If you don’t me asking, without me getting too much into your personal business, how much do you currently have in your retirement account”? (Say it with a disarming tone) If you haven’t gotten an angry response, you can then ask, “What kind of return are you getting?” and onto “If I could show you how to double or triple your current rate of the return, secured by real estate, would you be open to having a conversation with me?” Anyone who is remotely interested in getting a better rate of return will be interested in what you would have to say.
Step 2. Paint the Business Model in detail for Your Investor
This is where you’re going to want some education and training before you explain your business model to a potential investor. If you’re not equipped to handle this amount of explanation and internal understanding of how real estate investing works, pause this article, get trained, and the come back to finish this article 6-9 months down the road. I really do mean it. You can’t BS your investor and trick him or her to invest in you. It will be obvious.
In this step, you’ll explain how the fund from your investor’s retirement account is going to be transferred into your business. First, the investor would want to roll their funds over to a genuine self-directed retirement plan. Remember, you’re not asking the investor to take out the money from his or her retirement account. That would be considered as a taxable event which is already a 10-15% fee depending on the custodian. The new self-directed retirement account will be considered as an IRA LLC (Individual Retirement Account with Limited Liability Company). It’s an IRA that is holding an LLC so that you and the investor can have a checkbook control. Let’s say your investor invested $50,000 into the IRA LLC. As the Real Estate Investor, that you are, you’re going to put in $50,000 worth of services, performance, and intellectual property into the company. Some of you may be confused by what I just said there. You’re not actually putting $50,000 worth of money into the IRA LLC. What you’re doing is putting forth $50,000 worth of “effort” into the deal. While your investor may not engage in any investing activity directly, he or she has put in the actual money while you’re doing all the work. That makes you and the investor a 50/50 partner of the IRA LLC.
You’re going to show your investor that all of the money in the IRA LLC is going to be secured by Real Estate. That means, unlike stocks, your investor will still have a real estate property tied to the IRA LLC even if the deal goes sour. That’s a safety net for your investor because he or she can sell the property and still get a good portion of the money back. Along with the safety net, you’re going to explain all the risk mitigation process that you have in place so that your investor won’t lose the funds. Get into the details of how you’re going to use the money. Will it be a fix and flip? Buy and hold? Or both? How are you going to exercise the money so that you can generate at least 24% ROI within a year? If you’re unsure on how to execute a successful deal, please don’t hesitate to reach my team at student2investor.com
Step3. Obtain Buy-In
This is all about empowering your investor with clarity and certainty. Well first, you must believe in your plan yourself. Get educated. Learn the ins and outs of the plan. Also, consider any legal ramification and flaws that could get you in trouble. Hire a good attorney to watch your back! Once your investor sees the plan and understands what the plans are, he or she will be ready to move to the next step.
Step 4. Set-Up Consultations with A Good Attorney (KKOS is what I recommend)
Now this is the part where you will consult with your best real estate attorney to draft documents and set-up the IRA LLC entity. I personally recommend KKOS as one of the best attorney team that can help you set up an IRA LLC. I assure you that it’s not cheap but it is worth every penny you invest in creating an IRA LLC with KKOS. Tell your attorney what you’re trying to do and what you would like to accomplish for both you and your investor. What is the best protection method available for your situation? What can and can’t you do? Ask smart questions.
Step 5. Finalize Your Paperwork
Remind your investor periodically where the funds are going and how it’s going to be used. Update your investor on what’s going on. How the project is going and what paperwork is required to complete the deal. Make sure you have all the appropriate contracts, documents, transfer receipts and memorandums completed. Also, if this is your first time running this strategy on your investments, be sure that all of the business is conducted using your IRA LLC entity. Never use your own personal name.
Step 6. Fund your Entity
Now that you took care of the logistics with your attorney and your investor, roll the funds from the investor’s old retirement account over to the new IRA LLC. Remember, you are conducting a Roll-Over not a withdrawal with the account. Once the fund reaches the IRA LLC, you should now have a checkbook control of the IRA LLC. You can now acquire a good real estate deal to generate profit for you and your investor to share. The greatest aspect of this strategy is that you didn’t have to bring in any of your own money on the table. Rather, you leveraged other people’s money (OPM) to allow them to make money and at the same time, you generated revenue for your investing business.
I want to make sure that everyone who is reading this article is properly trained. Please do not engage in any investing activity before you get any supervised training. Hire a good real estate attorney. I do not endorse any investment activity without getting an attorney involved. If you’d like to receive supervised training and mentorship from me, check out www.student2investor.com