I’ve got two words for you:
Be. Careful.
If you watched “The Wolf of Wall Street” and thought to yourself, hey, good idea… you’d better be extra careful. That movie was supposed to be a cautionary tale, but it kinda glossed over the difficulties of spending time in prison.
But if you’re the kind of person who doesn’t want to run afoul of the law, and you’re looking to raise money to purchase real estate: do it the right way.
First – it’s not cheap to do it the right way, but it will help you avoid prison time.
You’re gonna need a really good securities attorney, and they don’t come cheap.
Why do I need a new attorney, you say? What about dear old Uncle Lou – he’s got a law degree (pretty sure it’s even real), and he says he’ll work cheap…
Bad idea.
Securities laws are super complicated (read: insane), and what you don’t know will hurt you. Ignorance is not a defense.
Your attorney will need to prepare a Private Placement Memorandum (PPM) – it’s a huge document that includes a ton of details about you, your plans, your tax status, the risks involved, and much more.
Second, you’d better not get it wrong, because if you get investors based on an erroneous PPM, chances are good that you won’t end up with any profits… and if your investors sue, they can probably wind up tying up your assets (and time) for years… if they don’t get it all in a lawsuit.
Michael Blank has a good article on BiggerPockets that says:
When you accept funds from others to buy an apartment building, you are effectively selling shares, or securities, in the LLC (or other entity) that will own the building. As such, they fall under federal and state securities laws.
These laws differ by state and by how complex the deal is. Typically you have to provide your investors with some kind of disclosure document, and you have to file some forms with the federal SEC and possibly with one or more states.
Most investments will fall under the SEC’s classification of “small” offerings, i.e., not exceeding $5,000,000. The most important are those under Rules 504 and 505 of Regulation D. Under these rules, you can’t raise more than $5M and have no more than 35 non-accredited investors.
The SEC defines “accredited” investors with a household net worth of at least $1,000,000 and an income of $300,000. There’s no limit with how many of these types of investors you can have.
This impacts your fundraising only in the sense that you shouldn’t have more than 35 non-accredited investors.
Under these rules, you also can’t solicit strangers with your offering. This means you can’t put up billboards, send out mail, or post newspaper ads. Well, you can, but you need to file under another Rule, and then some of the requirements change.
Honestly, if you’re just getting started in real estate, raising money from private investors is a terrible place to begin. You’re like a guppy diving into the shark tank.
That doesn’t mean that you can’t use other people’s money to buy real estate… it’s just that you have to get paid in a different way.
It’s a lot cheaper to take shares in someone else’s company than it is to start your own.
If you’re considering starting up a real estate investment company but you don’t have any money, think about working for an existing company for a few years to get some cash flow going. If you’re diligent and persistent, you can usually get an interview. Most real estate investment companies have opportunities that they need help to capture, so if you can dive in and help them land some decent deals, they’ll want to keep you around. And if you make money for someone first, it’s easy to ask them to invest with you later.
The other pathway to consider is crowded but lucrative… get your broker’s license, and start focusing on selling investment properties. It’s a lot cheaper to start up as a broker than it is to hire a competent securities attorney and prepare a PPM… plus you’re way more likely to get some actual income. It’s very tough to make it as a broker, but again… if you target the right firm and work your ass off to make money for other people, you’ll start to see the commission checks roll in.
Plus, the folks who are buying and selling buildings are actually your best targets for future investment. You can form great relationships with them as a broker without ever running into trouble with the SEC… and you’ll get a ton of valuable experience.
Don’t think it’s impossible to start raising private money – but don’t underestimate the time and energy that it takes to prepare. Unless you’re already wealthy and know lots of other wealthy people, raising cash from private investors is challenging… and comes with a lot of legal risks.
So be careful!
Consider some alternate routes to help you build relationships, cash flow and real estate experience before you dive head first into the shark tank.
