The most common question asked by syndicators is, “How do you find investors?” Unless you have already been syndicating, people generally show some awed respect for this seemingly impossible task. In fact, actually doing it is not as mysterious or as difficult as you might imagine, although it does require some organization and concentration.
Before we get started, I must tell you that selling membership interest in an LLC to other investors is a security that requires following state and federal guidelines. In the selling process, you must follow some guidelines because you will be making a private offering. Each state has its own guidelines so make sure you review them. One common theme among state and federal security laws is that the person (potential investors) must be a personal contact.
Step 1 – Develop a First Stage List
Whether this is your first or tenth venture, you start the process out the same way. As such, you have friends, relatives, clients, customers, or some close business or work associates. Put their names down on a list. You should have no trouble assembling 25 to 50 qualified names. If you are in the real estate business, such as a real estate agent, you probably know many other real estate investors to add to your list.
Step 2 – Contact Those on the List
Although you eventually should try to meet with the potential investor, your initial communication can be by telephone. After opening with pleasantries, let the potential investor know that you are involved in something that is “unique,”or that “offers an unusual opportunity,” or that “looks to be extremely profitable for me, and I can get you in on it if it makes sense to you, too.” In other words, you want to hook your contact right up front. You want to use some catchy word or phrase that piques their interest so that, hopefully, they will ask you to tell them more.
Step 3 – Get the Private Placement Memorandum (PPM) in the Potential Investors Hands
Ideally, you will meet with prospective investors for a few minutes to hand them the package along with a brief cover letter. Your letter highlights the main points (the property, income and value benefits, timing, investment amount, etc.). A stellar cover letter is a highly effective sales tool.
Step 4 – Develop a Second Stage List and Get the PPM to those on the List
After completely going through the first list, you will know how many of those potential investors are good prospects for your deal. If you don't feel that you can fund your deal solely with the people on the first list, then put together a second stage list while sending out packages to the first list.
The second list requires some deeper thought. You'll be amazed at how many additional names you'll come up with after sitting down for an hour with a piece of paper and pencil. To stimulate your thinking, list various categories of businesses, professionals, organizations and other people you know in these categories.
This list might contain your tax accountant, financial advisor, attorney, doctor, church member, social group member, teacher or other people you know. Soon, you'll find you have another list of 25-50 people.
So that you stay organized, add these names to your first list. You always want to have a master list from which to work from. Your selling efforts are exactly the same as on the first list.
Step 5 – Develop a Third Stage List and Make Contact with These People
You may not need to go this far. You should have funded your group investment partnership with investors from the first two groups. However, if you still need additional investors, the concentration with pencil and paper as used before will produce more prospects for your deal.
Go through all the categories noted above to ferret out new names previously missed. Also, your friends and investors that have agreed to invest money with you can be sources of prospects for you. While you do not want to enlist them as “finders” of potential investors, their knowledge of your deal can result in some of their friends being added to you third stage list.
Step 6 – Close Your Prospects into the Deal
You will, of course, be signing people up and collecting their funds throughout this whole time period. As you are doing so, you must make sure that they qualify for the deal. Don't be afraid to tell them that they just don't qualify (too little income/net worth, lack of understanding, etc.). It is much better to lose them now as an investor than to get them in and have them pressed financially if the deal does not work as planned. Also, they may be a future prospect and will hold you in high regard.
If the prospect is qualified, have them complete and sign the Statement of Suitability and its Questionnaire exhibit(s). This statement, the signed LLC operating agreement and their check constitute the documents you need to have them in the deal.
There you go. You have a 6-step system to raise money for your small group investment property. The first deal is the hardest, but once you get it done, each subsequent deal gets easier. You'll find current investors referring other investors and soon you'll have more money to invest than good deals.
Finally, make sure you have a great deal before trying to raise money. Great deals are always easier to find investors for. Make your raising money job easier by bringing great deals to your potential investors.