In this episode I talk about one of my favorite and effective real estate investment strategies. Whether or not you’re a seasoned investor or new to the game, one of the most important things to be able to do is sell to LPs, and it might seem counterintuitive, but don’t roll out the red carpet. This is real estate investing for beginners, but a lot of veterans in the industry forget about this. Don’t flower up your deals and conversations when talking with potential investors. In fact, I’ve found that the better approach is to talk about the downsides of a deal–to talk about what you’re struggling with.
This approach and process has developed over the years, but I’ve learned that it is a unique way of gaining an LPs trust. It helps manage expectations, because if you really think about it, investors already have an idea of why they might want to invest in you. You are not their first stop in the research process! They’ve done their homework and if they are talking to you, they’re already serious about striking a deal somewhere.
So, what are the negatives? What are the risks I’m up front with when LPs approach me? First off, property tax risk. The towns I’m buying in are not growing. They were booming at one point, but they’ve had a drop off in growth. Not only is their tax base low because of this, their infrastructure costs are high which puts a bigger burden on the companies that are already there. The second thing that can scare the hell out of me goes hand in hand with the first, and that is the lack of population growth, but I’m thinking long term–5 to 7 years when buying up property and in that time, a lot can change in an economy. I then throw the question out of the worst case scenario. If interest rates rise, inflation goes nuts, and the economy is hurting, are they okay with a long term relationship? With all these negatives in mind, how does it make them feel? And then I leave it at that.
It seems counterintuitive, but investors appreciate it. When they’re looking at investing in real estate they’ve told me, and naturally, they begin talking about what they like about the deal–they tell me what they’re thinking. Which brings me to my final point. This is not only a process for me to be transparent with investors, but it allows me to vet anyone who approaches and wants to make a deal. Sometimes I scare the hell out of them, and that’s okay. I don’t want someone looking to do a quick, big flip because again, I’m thinking long term and looking for a good business partnership as a result.
Three Key Takeaways
- Be honest about the negatives. Investors appreciate me being up front about the risks involved, and as a result, a solid business bond is built as you do this.
- This is a process for you to vet investors too. It’s an opportunity for you to flip the script and see if they are someone you want to be in business with.
- You don’t have to focus solely on the negatives. I’m in a unique position where LPs are approaching me left and right and I need to be a little more rigorous with my filtering process. You may be new and might really need an investor. Talk about the good things. Sell your deal, just don’t be idealistic and fake either.
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