How to Invest in Commercial Real Estate

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Episode #082 - 6 THINGS You Need to Do Before Asking Investors for MONEY!

by Criterion, Braden Cheek, Brian Duck
October 18th 2022

Today hosts Braden Cheek, Brian Duck and Joel Thompson discuss 6 things you should do before asking potential investors to part with their hard earned money.

Time Stamps: 0:00 - Introduction... More

Alright here we go. Let's get up let's that. No that's great. All right. Here we go. Alright welcome back to how to invest in commercial real estate. And we are back with another exciting topic today on how to ask people for money. Right? So this is an interesting topic that we'll get into in a second. But first it is distribution time, Distribution time. That's right. So this quarter criterion set a record number we sent out. $308,500 this quarter for Q3. So I'm Pretty proud of that. Yeah precision equity was well in excess of 600,000. Almost 700,000. So we're over a million dollars in distributions. Uh enforcement every quarter. Fantastic. That's a lot of money. It is actually I say it every three months. It's my favorite time of the year and I get to have it four times a year with a lop a bunch of checks On my desk and it's all the people that trusted us with their money, it's relatives, it's friends, it's co workers and I love signing those checks because I don't know of a lot of people that get to send their friends and family that much money every quarter.

I mean it's it's pushing 2.5 you know $3 million dollars a year that we send to people that we know and like that trusted us with their money and it's awesome. Just for Precision four million a year for the two companies. It's fantastic. Um We just came off of a sale of the out parcels. A plaza West. We talked about that before. So I just want to mention that again, another huge, I mean massive home run. We bought the property in january, paid down a million and half in debt and returned all of the equity in eight months and we had no real intention of doing that. It was, it was a possible upside notes on it. And it worked. We're also about to come up on the sale of the Kiddie academy we developed with the Woodmont company in Dallas. Also super exciting. Um, we ended up selling that for, I think $6.3 million best sales projection we had was like 5.8 and we're closing win this week or next week. We're supposed to close this week. So, so probably next week realistically, and so checks will be coming out after that Checks will be coming out after that.

Yeah, we'll return all of the equity will have a bit of profit and then we have an acre of excess land that we didn't develop and contract and that should close the year. And that's another $900,000 to the same investors and it was only a million dollar equity grease. So that's a decent amount of money in and out in two years. And another successful Man that was ground up. But anyway. Um, I mean, you mentioned types of investors, we have friends, family, colleagues, but there's, there's starting to become a lot more than that, right? Like a lot of people are listening to podcasts hitting us up. A lot of people have watched what, um, you know, you guys have been in this a little bit longer than me. So they've seen a lot of your success over the past, you know, 15 plus years. Um, and we're starting to get a lot more people get involved in these deals. So today I thought it would be a super great idea to just go into. How do you ask people for money? You know, what, what are some things you need to have? What is the list that you can just go through and say, okay, criterion fund guy said, or if we have this list, we can go ask people for money. So let's just dive into that. What what are some of the top things that you need to have ready before you go ask people for money?

My personal opinion is if someone was watching a podcast and said, hey, I think I'm interested, I'm getting to that point and I want to know a little bit about criterion. The first thing I think they do is they look for a website. That's, that's, that's what I do. So that's, so my opinion is that's what, um, an investor or potential investor is gonna do, what do you guys agree with that? I mean, if I was a podcast listener, I'd be doing some R and D some rip off and duplicate and that's arguably why we started this podcast. Right. I mean, our first goal in the beginning was we need to create a presence of whose criterion, what is criterion doing what is the mission of criterion? And now you can go to our website, we have several websites, we have a podcast, we have a Youtube show, all of this stuff and you can learn on your own time without ever meeting us and without ever talking to us who criterion is and what we're about. You don't need all that. I wouldn't say, but I think a professional looking website is important. Yeah. The key is establishing credibility. That's going to be the number one key to getting people to part with their money. And yes, the podcast will be great, write a best selling book.

That'd be great. But the cheapest and quickest way to doing it is to get a website up because that is so affordable and it can be done in a matter of days, uh, using some of the templates, using a personal assistant or whatever to get it up there and then you have instant credit on some level, it's gonna take more than that. But if you don't have that, they're gonna ask questions. And so what we're trying to do is help you guys give you the confidence to go to people when I think back before we started taking investor dollars, we could have done it earlier, but I was self conscious about it. We didn't, we didn't have a big presence. I didn't really know, I didn't want to get rejected. And so some of these things will give you the confidence if you can take the time to put them in place in order to go to the people, you know, and and ask them for money because you have some of these steps already implemented. So I agree with that. If I'm in front of investor, I'm talking to them on the phone or something and I can say we'll go to our website, check it out. We've got all this information on there. I think that that helps a lot. So easy. First step is get a website. There's plenty of websites you can copy from.

Uh, you know, get some information on, you know, cool bio that you have ready to go and what properties you like and what your goals are and how your, what's your investing strategy, all that. Put that on there. And I guarantee it'll help. Don't overcomplicate it. We have five reasons why you should invest in commercial real estate on our website. And it's like the most basic thing that's kind of where we started. And that's one of the first things we threw up there. Alright, sticking with the providing investors confidence theme is a track record. Yeah. Let them know what your track record is. You can have it on your website or you can just, you know, you can have notes or brochure or something, but they want to know, have you done deals before and what, how did those go? And maybe it doesn't have to be a deal because a lot of people are saying, well I don't, I don't have any deals. This is my first deal. I think a track record could be, well like Brandon, he worked for a commercial real estate company first and, and did a lot of these things that are necessary to have had his own company. And so that could be a track record or maybe he just flipped houses or something, you know, or, or maybe you had some houses, single family homes that you rent it out or something that could be a track record.

I think I would say test test the market. You know, obviously you need to have something, you know, if you don't have a real estate license, if you've never worked for a real estate company, if you've never invested in real estate and you've never had any partners that have invested in real estate and you're just winging it, nobody's gonna give you any money. Right? So think about yourself being on the other side and say, what would I want somebody to have in order for me to invest this amount of money and and just borrow someone's track record 100%. Like could you say, hey, I I've got a good friend and he's, but he's purchased this exact multi tenant strip center or one very close to it and here's how that deal went and give him several examples of exactly the one that you're pitching them. Could they get comfortable with someone else's track record? I mean I'm just gonna shamelessly talk about myself if you go to our website and look at the bio, it says I've closed all these transactions. I own like less than a third of those. Right? The rest of them are your guys is from when I worked at precision. Um, brian is a very similar story, right?

Like brian's invested in a ton of real estate deals. He's been involved in numerous amounts from the beginning to the end have had a lot of acquisitions and exits. So yeah, you can't just say, I have no experience because you weren't the one who signed the closing statement. Like you have to be practical about this and not lie, But just realistically say, hey, we've been involved in these transactions. Here's how it works. Here's what I've learned here. The people on my team. Yeah, Yeah. I think it's probably, it's better if you have your own, but it's probably enough people want examples of the deal you're pitching them and how it's worked in the past and it cannot work for them. And so I don't think it has to all be your particular one, if you could show them and demonstrate how this particular real estate does this return and has the chance to deliver this kind of money to them. I think that could be enough. You know, if it's not right, somebody who's done it and say, hey, everyone told me they wouldn't give me money because they don't have enough experience. You seem to have a lot of experience. Can I give you some equity and some money? So you're a partner in the deal and, and we can use your experience and, and maybe you can help me, I'd look at a deal like that if somebody brought it to me for sure.

So, you know, don't let the track record be a barrier to you. You can definitely use that strategy, bring on a partner a lot of lot of different ways to do it. What's next? Well, you, you want to be able to tell these people how they're gonna make the money right, how much it's gonna cost or depending on how much they want to invest, where the money's going, what kind of income they're gonna make, what the exit strategy is, right? So we call that a proforma in our business and it's kind of like an offering memorandum on a sales properties for sale. Yeah. You know, it gives details about the project. It shows the money in, it shows the income, the expenses and the money out and how long of a time period that is. You're basically showing the investor, hey, this is what I'm gonna do with your money and this is when you're gonna get back and this is the return you're gonna make, that's the performer. You have to give them a story and show them, draw them a path from the day to invest to the day to get my money back. How does that happen? What's happening in between? So they see that path That, like you said, it just gives you credibility.

You can't just say, oh well if you invest this much, I'm gonna give you a 20% return. They want to see the path, you're going to get that. Here's how to not get credibility and it's to make the path so confusing that, that you think you're, you're beefing yourself up with your credibility and using all these fancy words, but nobody can understand it. Right? Money in income expenses, money out timeframe. That's what we need. Let them ask questions and fill in the blank, Hey, where is this income coming from? I'll send you a rent roll. I'll send you more detailed information. Start basic guys, most people's level of understanding when they're reading through something like this. They don't want to read through an income statement. That's a sheet. It's a few lines. It definitely can be too expensive, too extensive to confusing. It can also be too simple. I've had people that have pitched me really high returns. But at the end of the meeting. I didn't know how I was going to get those returns and it can't just be magic. It can't be their word for it. I have to understand where the money is going and how it's producing. That return. Doesn't have to be complicated. But that's what the perform is.

Uh If you have any questions on that, we can give you some examples of the ones we use. You. Just test it. Go ask, go ask a banker. Go ask you know your father or your uncle or somebody. Hey, here's what I'm trying to do. Does it make sense? Yeah, I get it. If you, if your dad can get it, I bet an investor can. Alright, next. Well, to me, I would think that the next logical sequence that an investor might be thinking is okay. This is kind of your first deal. Got some experience. But I want to make sure I'm not being scammed. So I want to see something written down that says what's going to happen in case something goes wrong or So, I want to see some legal documents, right? Wait, I don't just wire you $50,000 and you just like handwrite a receipt. Thanks. Thanks. Right. Amazingly, some people will give part with their money over that. They never spend any amount of time thinking what if it goes wrong. Uh And that's where the legal documents come in is they hold the person accountable to make sure they do what they say they're gonna do now, if everything works out, nobody cares. But in the event, it doesn't work out. And let's say they lost their money, if there's nothing written down, there's no legal documents, then you just lost money and there's no recourse you can take besides, he told me he was gonna do something, he didn't do it.

But these legal documents are going to give them a pathway to make sure that everybody knows what the sponsor is supposed to do, how and when the money is going to be paid back and what happens if it doesn't uh and like, you know, the sponsor could die. I mean, they could have a health problem, you never know what's going to happen. And so you need to have the legal framework in place when you're gonna go ask people for their money. It also gets rid of a lot of that swindler risk that Neil Stenzel was on and talking about because it shows that they had the due diligence time to prep those the money to prep those, they had a legal team to prep them, they could be prepping them in in their favor or they could still be badly written, but that that's a whole different thing. Most people are just trying to scam, you out of their money, don't put the time and effort to form hundreds of pages of legal documents to have you fill out before they take your money. Right. That that doesn't make sense. So it gives you a lot of credibility when you provide that. Hey, I'm gonna send you some documents and document read through them. If you have any questions, let me know there's one document you're not gonna be able to get around and that's the operating agreement. The operating agreement is the instruction booklet for the LLC or the company that the sponsor is forming and it will outline everybody's obligations with respect to that investment.

Will you have that done before you start hitting people up for money necessarily? Maybe not 100% complete at this stage of our fundraising purpose because we know it's not gonna be an issue and they've seen our operating agreements and then you've got to have it. You gotta have it in the works at least timeline for sure before the deal closes and before you take the money, you should have it before you expect their money. Give them a week. There are other documents. If you're doing a formal syndication where you'll need to do additional documents. An attorney can help you with that subscription agreement, private placement memorandum. Uh And so you can consult an attorney for those. So maybe what you could tell an investor is uh Yeah, I'll have those legal documents for you. I have some, I'll have the rest of them before you send the money. Those legal documents will be there. You'll sign them. You can send the money. Okay. Alright, let's keep going. Okay, well, the next question or a question I get asked every single time we all get asked, every single time is how much skin in the game do you guys have? How much are you guys gonna put in? Right. I Love This one. Yeah. Well, lucky for our investors, we always invest our own money into our deals.

I'm never gonna take someone else's money without putting my own money on the line for them. So such a nice guy. Yeah, I'm a nice guy. So somebody has to be willing to co invest and they have to have the money to co invest, right? Yeah. So let's let's break that down. I want to be real specific on the co invest because it's misleading and a lot of sponsors are are smart about how they do this. So they say they put in their their co invest like their let's just call it a 10% 10% 10 to 20 is kind of the industry norm, I would say of of minimum co invest to show that you're, you know serious about it serious about it, but it's got to be net of their fee, right? So if they're getting half a million dollars in fees and they're only investing 100 grand back into the deal. Are they really investing anything? Probably not. So I would just make sure that Okay, what are your fees in this deal? When do you get paid? How do you get paid? So our again, our documents, you know, we always invest more than the fees we take most of our money is earned after we give an investor the 1st 8%. So we're putting all these hurdles in place to make sure the investor feels protected, that we're not just making all of this money before and giving them a crappy return.

Like we we have to give them what we would consider a good return before we really make any money on the deal. And again, that's spelled out in our legal documents. It would be bad if you we're pitching an investment and you were getting a non recourse loan. So there was no harm to you if the deal didn't work, you didn't invest any money and you took several 100,000 and fees to set up the deal. Well, that's a no lose for the sponsor. So now he's encouraged, she's encouraged to to not really care as much about the final returns of the investment. And you don't want that kind of situation. You want the sponsor to have something to lose and have his own money, her own money invested in the deal. Yes. Let's just talk about that. Since you brought it up the non recourse thing. Non recourse debt means that the lender, whoever gave you the money will not come after and sue you for the balance of the debt, they will just take back the property is my understanding on that? That's pretty close, pretty close. So you need to ask them where they're getting the debt, Are they fully guaranteeing the debt or is it non recourse debt or who's, who's guaranteeing the debt? Are you liable for the debt? Just some good questions to ask and be ready to answer.

That's our next point is before I give someone money, I'm gonna want to know that they have the debt secured because a lot of times the deals can fall out, they can they cannot work if they can't secure that loan. So you don't want to hand over the money. You want to know that they have that loan is in place or at least is has a, you know, a preapproval letter, not a pre approved loan commitment. And so, you know, that deal is going to happen that that he's able, she's able to get the debt, can they, will the bank take their signature uh in order to to loan those funds? So as an investor, uh you wouldn't, or as when we hit up an investor, we wanna be able to say, okay, well, we've got this loan, it's secured because investors are gonna say, well, what if you don't have it secured and then all of a sudden it comes time for money, the changes I'm getting less and and then I've got to decide at the last minute. Well, do I really want to be in on this deal. So if you got the lending secured than then that makes them feel more comfortable. Yeah. And the debt, the debt can severely change the returns. And the thing is on these deals, they're not, the returns aren't guaranteed, they're just uh perform a based return. I get people that ask that weight so an 8% preferred to turn.

That's so I get eight right now. I mean it's not it's not guaranteed that we work really hard to meet it. But if they don't have the debt, the debt secured and they've told you some numbers, but then the debt changes now you've given them their money, but instead of making 12% you may make 9% or 8% or something and they're not they're not really obligated to say, well I have to pay you that 12 because the deal, it just is going to make what it makes. So it's just a step to have that debt secure that will give the investors comfort that you're pitching. You've got that deal locked up. Especially now more than ever. Right? I mean if you talk to a lender and get a rate the rate changes the day after. You know, everyone's quoting spreads now just because the index is that they're quoting on are just moving constantly. So the debt now is more important than ever. We got. We got one more and this obviously isn't an exhaustive list? There's probably plenty of additional things, but we just try to condense a short list. What's the last one brian? Well, if I was an investor, I want to know who's involved. Besides if one person hits me up, what's your, what's your team? What's your, what's your management team who's gonna do what you laid out this path of things that are gonna happen?

This seems like a lot for one person to do. So I want to know that there's a team behind whether it's a legal team or, or whatever. Yeah. For us, we were thinking on this one, let's say I'm pitching, uh, an apartment complex deal and I'm pitching a return. Well, if it's 300 units, I'm not obviously going to do the maintenance and leasing and the management and so they're gonna wanna know, hey Joel, what if you get sick or what if you disappear? Who's managing this thing? How do I get my money back? And you know, most likely if you're beginning your career, you're gonna have a third party manager, you're gonna go and hire a apartment management company or a retail management company and they're going to manage it for you. But if you have that in place and you have that, that team in place that investors can go and ask, hey, how is this deal? Have you managed similar properties before. Is this a good location? What do you feel about the rents? All these questions they can ask of the manager that you've hired to manage this deal and they'll get a comfort for the deal. Yeah. The manager is going to manage that for however they would manage it for the receiver. If you defaulted on the debt, they would manage it.

If you disappeared for whatever. I guess Joel disappears a lot when Joel disappears, the management company still works right. They're gonna do it for the property and they're ultimately doing it for their fee. Right? So they're not just going to stop because they don't get an email. So they're going to continue to get those rent checks, deposit them, take care of the maintenance and and that's super important. I mean, as a general rule of thumb, I think we only invest in things that can be institutionally managed on on some sort of maybe not institutional but managed by some other company. So we can go do all of them. Something could happen to any of us on any deal. And and the deals are gonna keep right on going. Especially if The deal doesn't work hiring a management company, then I'm not as interested if if someone has to run around and manage a multi-10ant retail deal all by themselves just to make the numbers work Well at some point that person may make a mistake or may not be able to perform and yeah, it's too slim. It's much better to have a company and involved in that that way if if the manager uh takes another job or whatever, they can, they can backfill that position and the property doesn't lose any any steam anyway.

I I think that was a pretty good list. Um you know, 889 items there that you should think about that. You should ask yourself that you should come up with answers with and take to that pitch meeting with. You talk, talk to the investor and again, you know, try to make it a little less formal. I think I think people go into this and their biggest mistake because they have to have the money. You know, they go into a meeting and they're like, man, if I don't get this money from this one dude, I don't get this one deal. You have the conversation way quicker than that. You know, you can prep a lot of these things, you can put placeholders in for a lot of these things have conversations like man, if I bought a property like this or use somebody else's property that you know bought like, hey if we could do something like this, put all this all these pieces together, would you be interested in that and get a bunch of people who are interested and then go make the final pitch, you know this isn't just a one meeting thing. People can smell it at the table when they know you have to have that much Our friends at say the hungry never get fed. That's true. Yeah. So you don't want to be desperate for the money when you're pitching it.

But go ahead. I was just gonna say, I think our low pressure, um, tactic really works right because I don't think people feel like we're desperate for money. We're just trying to just trying to help them. But if you do want to give us some, go to the website, it's the criterion fun. Dot com join the investor list and you'll get sent all of our, all of our deals. So super easy. And if you've enjoyed today's show, make sure to like and subscribe and and ring the bell. So you get notifications when we post. Thanks guys. Thanks.

Episode #082 - 6 THINGS You Need to Do Before Asking Investors for MONEY!
Episode #082 - 6 THINGS You Need to Do Before Asking Investors for MONEY!
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