AMA - What If I Don't Want To Gamble?

Today’s episode is another AMA episode. That is ask me anything.  

Dominic asks

While I am new into real estate investing, I do have prior business experience. I am primarily interested in passive investing, for now, with a main interest being multifamily projects. With that in mind, your podcast “Money without a clue” really struck a chord with me. I have been listening to fundraising conference calls, reviewing the operating agreements, and so forth. I go through my due diligence checklist and my personal investment criteria. If things look promising, I ask questions to clarify any outstanding issues. I am new, so this process takes me a few hours, and ideally I like to sleep on it before I wire $100k. But what do you do when there are so many gamblers at the table who are apparently not doing any due diligence? Much like the lady you mentioned in your podcast. It seems that many deals that I’m seeing are subscribed before the conference call is held. On the basis of a few lines of information and no specifics. At any rate, I thought I would reach out and ask your take on this. Perhaps the same question has occurred to other listeners.

Dominic, thank you for an excellent question. 

It is true that there is a lot of money sitting on the sidelines these days. That money often gets deployed quickly when a good opportunity comes along. What you will probably discover is that the people who move quickly on opportunities like the one you described are not in fact gamblers, although there could always be a few hiding in their midst.

I suspect that what you are seeing are people who have made repeat investments with the same deal sponsors. 

I know from my own inner circle of investors that once we have returned capital to investors several times, they get to know us. They understand how we underwrite our projects. They have seen our legal agreements before and have completed due diligence on us as a team. 

I know that if I’m looking to raise money quickly, I’m going to call people who have invested with us in the past. I’m going to see if there is a fit between our near term requirements and the funds they have available. It’s pretty common for me to raise funds in a couple of days in that type of situation. 

But if I’m working with a new investor, it could take much longer. When I say new, I don’t mean that they’re necessarily a rookie, they’re just new to us. They haven’t invested with us before. In that situation, I will suggest that the investor put in the minimum investment, or in some cases I’ll suggest an amount that is even below the minimum investment, simply to start the relationship building process. I consider an investment of this type to be a get acquainted round of investment. Even with a large investor I often suggest a small initial investment to get acquainted with one another.

I as a sponsor will have qualified the investor on the first engagement and the process for making subsequent investments is much faster. Both the investor and the sponsor of the project know what to expect. 

If you’re having trouble getting into a deal, my suggestion is that you speak with sponsors who look like they might be a good fit for you. They may not have an open opportunity right at this moment. Ask to see their last representative deal and ask to go through a partial due diligence with them so that you could be ready for an upcoming project when it becomes available. You will have qualified them, and they will have qualified you. You can do all the reference checks you need to in the un-rushed comfort of a no-deal situation.