Lets just cut to the chase here. People who want to find investors don’t want or need to become lawyers. After all, if they get this right, i.e. investing real estate, they will end up in a far higher income bracket than most attorneys. For people like that – people like us – there are just three basic questions:
(1) What kind of documents do I need to get investors for real estate deals I control and co-own with passive investors?
(2) What can I legally do and say to find investors, while raising investor dollars for my real estate deals?
(3) Where can I find investors?
So lets hit those questions hard and fast, and get on with our day!
ONE – to do it right and keep yourself out of trouble you really need a good disclosure document, i.e. a prospectus to show to potential investors for real estate deals. This is commonly referred to as a Private Placement Memorandum, or PPM for short. Here are the basic guts of a PPM:
(a) A cover page followed by five to six pages of legal “boilerplate” that describes the laws which allow you to make a private offering without the requirement of registering it with the SEC.
(b) A table of contents with a number of standard headings, such as “Legal matters” and “Plan of Operation”.
(c) A summary of the offering, which is usually three to four pages.
(d) A section about the company itself, including shares or membership certificates offered, and how both investors and the sponsors can expect to benefit.
(e) Plan of Operation.
(f) Risk Factors
(g) Exhibits, as for example description of a given real property or an example of a real property as a hypothetical possibility if the final decision has not yet been made as to the exact real estate to be acquired. When you find investors this is a question they'll want answered.
(h) An “Investor Questionnaire” – a document that a prospective investor fills out that states in writing he or she meets the requirements of the offering as far as net worth and income are concerned.
(i) A “Subscription Agreement”, which is the document passive investors for real estate actually sign when they give you money.
Does that look like a lot of stuff? Well, don’t get your panties in a bunch! Sure, there is some work to do to put it together, but if you use a template it is not that hard. Get it together, then take it to a good, reasonably priced securities lawyer, and next thing you know you have a completed PPM for investing in real estate.
You can use it to raise money both with exiting friends and associates and subject to certain guidelines, when you find investors new to you.
Basically people give you money, along with a signed Subscription Agreement.
You take that money and invest it wisely; investing in real estate in the solid real estate deal as described in your PPM. (Do otherwise and you’re headed for trouble!) So that is part one.
TWO – in a nutshell you can tell folks in GENERAL TERMS about who you are and what you do, but you may not legally offer to sell them a membership certificate in your brand new LLC, using your brand new PPM, unless you have either:
(a) A pre-existing personal or business relationship with them, or
(b) They have completed and returned an “Investor Questionnaire” and indicated therein that either they are an accredited investor or a sophisticated investor. (You can find investors who are accredited and you can have have an unlimited number of them in your deal). A sophisticated investors need not have the income or net worth of accredited investors, but typically must meet certain basic sophistication and income levels you establish. You can typically have up to 35 non-accredited investors in a given deal.
Is there more to this? Yes. However that is the basic concept. Keep that in mind, follow a few other simple rules your lawyer will spell out, and you will be just fine.
THREE – you can find investors that are accredited everywhere; you are literally surrounded by them and can not walk down the street in a city of any size without passing them in droves. In fact one recent article I read estimated that based on the number of reported millionaires in the USA today, one in every 28 adults has a net worth of a million dollars or more.
The real question, then, is not where to find investors but rather how to develop successful relationships with them and their friends and associates. You want relationships that last for a long span of years, making them money while making you quite wealthy in the process. And that, friends, is a subject for a later post!
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G. Patrick Dague, Business Coach
Dad. Husband. Pilot. Friend.