No Cash, No Credit: Always Leverage Other People’s Money in Real Estate

Posted on Apr 27 2015 - 12:34pm by Lance Edwards
Lance Edwards. President, First Cornerstone Group, LLC.

Lance Edwards, President, First Cornerstone Group, LLC.

One of the most important steps to remember when building your own real estate empire is to use other people’s money. I can’t think of a better example of this than the actions of two of my Circle of Champions members, Denon Williams and Carrie Warren.

These partners from the Carolinas had zero real estate experience when I met them, other than owning their own home, and both had been laid off.

They’d been at a company for 25 years and they’d been laid off and when I met them they wanted to get started buying and acquiring real estate and here’s the problem. They were unbankable because they had no W2. Banks aren’t going to loan money to somebody that doesn’t have a W2 because they want to see that W2 income.

Well, what they did over the next 10 months is they actually did four deals, four major deals, purchased property and funded $6 million of those transactions 100% using other people’s money. They used none of their own cash in any one of those four deals, they had no credit checking in any one of those four deals and they had no prior experience.

So you look at this. How is that even possible? How could anyone possibly purchase $6 million in real estate with none of their own cash, none of their own credit and no prior experience? How can you possibly do that? Well, there is a formula. There’s a formula. I’m going to share with you the same formula that I taught them.

This is how you’re going to get your leverage using other people’s money by being able to raise private money. So this is the raising private money formula and I’m just going to give you the formula real quick. I’m not going to be delving deep into this. That’s not the purpose of this training but I want you to know this four-part formula because this is how you can fund anything from $6000 to $6 million whether you need rehab money, downpayment money, acquisition money, earnest money. Any money that you need for your deal is through this formula.

So raising private money formula, there’s four parts: predisposed, control, low risk, high return, predisposed, control, low risk and high return. All right, what do I mean by that? Well, predisposed means we go out to raise money for our projects, we’re only going to focus on predisposed investors, people or groups that are looking to invest in real estate deals.

They believe in real estate as an asset class and they’re ready to invest their money in real estate but they’re just looking for the proper deal, all right, predisposed groups. Now, I’ve already told you one of the predisposed groups up front: self-directed IRA investors, self-directed IRA investors, one of those predisposed groups.

Here’s another one: sellers when getting owner financing. There’s another predisposed group. That’s just two of many more that we teach but those two right there will get you started.

All right, once we have an investor, how do we attract them to our deal? Well, that’s what the rest of the private money formula is about, how to structure our deal to make it attractive. When we structure our deal, we have to do it in a way that provides that investor a feeling of control and a feeling of low risk because the number one question, the top of mind question by any private investor is this: tell me about return of my capital before you tell me about return on my capital, which means they need to be confident they’re going to at least get their principal back before they even listen to any claims about what a great project this is.

So we address that question about preservation of capital by giving them a feeling of control. We intentionally structure the deal so they feel like if something goes wrong in the project they can take control and get their money back out. That’s paramount.

And then next what we do is we structure the deal to show them how we’ve created a low-risk investment and we’ve mitigated the risk strategies and created a low risk investment. So now they’re feeling comfortable that, yes, indeed there will be a way for them to get their money out of the deal.

Then the final thing we do when we structure our deal is we structure it in a way to give that investor the feeling of a high return. But here’s the key part. It’s high return relative, underscore that word, relative to the low risk that we’ve build in.

We spend a lot of time structuring and demonstrating to that private investor how it’s a low-risk investment. As a low-risk investment, the investor’s expectation of return is low but we’re going to give him a high return relative to that low-risk expectation. And when you do that, you are basically answering that top of mind question about preservation of capital and you’re letting them see that they’re getting a deal by giving them a high return relative to that low risk and that’s the four-part formula.

Now, what we do not do is go out and just advertise some – waving some big high return absolute return to private investors and just scare them away and that’s what most amateurs are doing and that’s why they can never fund any deals. You follow this formula. This is the exact same formula that Denon and Carrie used to fund $6 million across four transactions over 10 months using none of their own cash, none of their own credit and they had no prior experience. And I’m going to be teaching you how to structure and present your deals to predisposed investors, exactly the same way that Denon and Carrie did it.