The Science of Flipping - How To Raise Capital And Structure It

Episode Date: October 7, 2021

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What's up everybody welcome back to the science of flipping podcast I am your host Justin Colby and on this episode we are going to be talking about raising money raising capital how to do it why to do it and how to structure it let dive in. But if you are just listening to this on podcast, iTunes, podcast, Spotify, awesome. Give me a five-star review. I would love that. But also realize I do these videos on YouTube as well, and I drop six a week week so go to youtube.com forward slash justin colby make sure you subscribe and by the way youtube gods love when you like my videos so please like it and again i drop six videos a week jump over there subscribe and make sure you're liking the video so this is for you real estate investors that are trying to figure out how to raise money,

what to say, etc, etc. Here's what I will tell you. I've never had problems raising capital because I don't sell it. I don't go around promising I can get you a certain rate of return, which, by the way, turns into securities fraud if you do. I highly don't suggest that this can be a very sticky scenario. If you're walking around telling people that you will promise them this type of return

or guarantee this type of return, you do not want to do that stay as far away from that as possible. So you don't get in trouble with the SEC but there is a good tactical you know moral ethical way to do this and that is simply giving people the opportunity to invest with you so here's how I've done it and I want you to think about how this could work in your space so So anytime I've raised monies, typically with someone that is somewhat within my inner circle, outer circle, or my social circle, and here's what I mean by those three circles, if you will. First, the inner circle is obvious.

My really close family, my really close friends. That is my inner circle. My outer circle would be the people that are on the periphery, meaning they may be my friends, but maybe they don't go to my wedding or I don't go to theirs, but I would still consider them friends. Maybe they're work colleagues that I would consider work friends.

Maybe they are friends at the gym that every day we go to the gym, we shoot the shit, we talk business, we talk sports, but we really don't hang out outside of the gym that every day we go to the gym, we shoot the shit, we talk business, we talk sports, but we really don't hang out outside of the gym. That is what I would call my outer circle. And then I have my social circle. And what I mean by that is I have my social media influence, right? Whether it's Facebook, Instagram, TikTok, and those are places that you can also find people that are open to having opportunity. That is what you are selling. An opportunity to be in real estate with me. That is it. And so I don't even sell it. I don't want to sell this concept or idea. I want to be able

to give them a true opportunity to be doing something and being a part of something that they wouldn't have outside of partnering with me. Ultimately, I have gotten, you know, millions and millions of dollars through my inner, outer, and social circle for flips, development projects, and so many other things. Buy and hold rentals that I'm buying. And there's really a certain way you want to do this. Now, first of all, you can give them an opportunity to partner. They can actually quite literally be a part of the deal that you will split profits with them, whether it's 50-50, 60-40, 70-30, 75-25,

and they will bring all the cash for the purchase, for the rehab, for debt servicing, for maintenance, for all of it. They'll bring all the cash and you'll do a partner share, right? So it'll be a JV partnership. And in that, you need to make sure in the paperwork that you make very, very clear, trust me, as I just had to deal with an incredibly painful lawsuit over this nonsense that no one ever wins in a lawsuit they didn't win I didn't win it's over but it's just painful um the paperwork needs to clearly clearly say if profits are had how is it split if you lose money how is it split and if you lose money maybe it is clear that the managing partner such as myself that does not bring the capital does not share in any losses in the capital

partner takes responsibility for all losses you can say that in the paperwork whether the capital partner would want to do that or not is totally negotiable and up to them. So that is one way to raise money is to really just give them an opportunity to partner with you. The other way would be to make them a true lender and make it debt, right?

And maybe you incentivize if deals go well enough or if they're open to doing more than one deal, maybe there is some sort of upside in terms of maybe you give them 5% or 10% of profits along with the debt. By the way, to be very clear, all of it is totally negotiable. There's no 100% right way to structure the deal. It's really what's going to work for you and your capital partner so that being said i would tell you that in terms of debt again the paperwork really wants to outline you know what the interest rate is what the payments would be whether it is paid monthly whether it is paid at the close of sale when you sell it but But what you really wanna be able to do there

is to show a picture of, hey, I'm gonna be able to have your money protected by the asset. You will have a deed of trust and potentially a promissory note. Basically, just like a bank would, that this is the interest rate on the money, this is the monthly payments,

and this is what it will accrue at, and the payoff would be at the end now those are the two primary ways that I've ever done deals is I bring in a partner or I bring in true debt for me at this stage of my career after doing this 14 years I have my financial partners bring a hundred percent of the money okay so even was I'm buying rentals right now, I'm physically sitting here in Scottsdale, Arizona, but I'm buying rentals in Oklahoma City in Tulsa, Oklahoma. My capital partner brings in 100% of the money for the purchase price, for the remodel. If any maintenance needs to happen during owning the property, they bring in all the cash.

And for that, I created a partnership with a split. So he was very open to this because he has a full-time job. He makes a lot of money, but he has no time to build wealth. So I said, hey, let me be the managing partner to help build wealth for both of us. You just bring the cash. For him, literally, that was the whole conversation. I mean, it took a 17-minute call. He was driving to Tahoe. I was in my office. He said, hey, let me spend this week and just think about it, but I'm pretty sure I'm in.

We just agreed to how much money we needed to start, and he was in. Now, that is a unique scenario. It doesn't always happen that quickly, but he trusted me based around the people I knew, and he came to me through very close people, close friends of mine, right? So he inherently trusted me. If you are talking to someone, you don't want to sell them on it.

The first question you wanna give to them or ask them, I should say, is, hey, are you open to investing with me on some of these flips or some of these rentals? And if they say yes, they will likely ask, well, what does that look like? And you say, hey, why don't we just sit down? It could look a bunch of different ways. Let's just talk about what your interest would be and what my interest would be.

And if we can make something work, then let's do that. And then you just have a normal conversation. But it's really the opportunity to invest with me, right? To invest in properties with me, to invest in flips with me, to invest in rentals with me. And if you're open to that opportunity to make those investments, then let's have a conversation what it looks like. I am currently in the middle of negotiating another financial partner who I have not yet worked with per se um and so we both feel

really good about this we have not written our operating agreement because we are going to create an llc with this partnership um but you know ultimately he's in in to the opportunity i'm into the opportunity it's just quite honestly a matter of just putting it together on paperwork, which I don't have a lot of time as I'm moving. By the way, if you guys like this subject and you are watching me on YouTube, smash the like button, it's about time you do that. And always make sure you're subscribing.

Give me a five star review on iTunes or Spotify if that's where you're listening to this. So I want you to take the pressure off of how to raise money, how to structure it, because the reality is the conversation to start is the opportunity to invest in this property with me or the opportunity to buy rentals with me. If they're into that, then it's a simple conversation. Hey, this is what I'm looking for. I'm looking for a capital partner. Here's how I'd prefer it to be structured. Are you open to that? And if they say, no, this is what I want. It just comes down to negotiation. What I will tell you, every single time you do this, you need to have the paperwork

to support both sides. Be very clear what happens when you win, what happens when you lose, who shares in the profits, who shares in the losses. Make sure it is very clear. As I just mentioned, I had to go through an arduous lawsuit because my paperwork wasn't you know air tight this was you know four years ago um but the lawsuit literally just ended if you can believe that so um i can tell you no one wins in those scenarios and so long story short make sure your paperwork is airtight but don't be scared to have the conversation i tell everyone this the things that you want need to be talked about right the things that you focus on you find so if you're at the gym if you're out hanging out with friends and people are like

what's up man what's going on hey man i'm actually looking at buying a couple flips or a couple rentals or this and the other looking to see if you know looking to raise some money for it and try to figure that out would you have any interest in partnering with me and putting something together on these yeah man what do you think and then have the conversation because it doesn't have to be laid out with some big presentation you just want to have a conversation why would they be interested in investing with you or in these properties um and then what do you get out of it what do they get out of it and what's in it for

me is what's happening in their head you're thinking the same thing and so you just say hey your your money's protected around the home you'll have the deed of trust right you'll have the promissory note and here's how everything is split so again be careful you're not guaranteeing anything be careful you're not co-mingling funds do not do any of that. Have one lender per home, ideally. In terms of a private lender, you can always have a hard money lender there. And then the private lender gets moved to second position. But guys, raising private money really isn't that difficult. The challenge becomes is most of my students, most of you watching this video have a challenge having the confidence to even bring it up that's

where the challenge starts if i if i can help you build that confidence then you bring it up you have a normal conversation and i promise uh things will go well for you so hopefully this helped if this did help or if you have any questions leave a comment below ask the questions below get some engagement like the video subscribe to the video turn on the, and I'll see you guys on the next podcast. Peace.