3 Tips to Raise Capital & What is the Lifetime Value of Your Investors?

How should you raise capital for your first real estate deal? What is the lifetime value of your investors? Should you get investment commitments or a deal first? Dave Dubeau has been investing in real estate since 2003 and shares his insights.

You can read this entire episode here: https://bit.ly/3jKirbM

Let's say we're ready to do a first raise. I have a list I have relationships, people know what I have been doing. What is the first thing that I should do?

The first step is, in my opinion, to create a target group of prospective investors that you're going to really focus in on. If you don't have a track record with raising capital yet, who is going to invest with you? A big mistake I see a lot of people making is they go out to the general public, anybody with a pulse and a checkbook, they think could be a good prospective investor. For somebody to start investing with you, they need to know you, like you, trust you with their money. If you're going out to strangers, they don't know you, don't like you, they certainly do not trust you with their money. That's a very difficult hurdle to overcome off the get go.

Should people ask how much they would be interested in investing before or after getting a property under contract?

The chicken in the egg question. My personal opinion is, let's get some soft commitments from prospective investors first. Let's get our investor ducks in a row and then let's go looking for properties. Because when you have a deal on the go, yes, that's a good motivator, but the challenge is, you're desperate. You need the cash for this deal, and that desperation, whether you want it or not is going to ooze out of every pore in your body. I far prefer to have these capital conversations first, and get people to even sign off on an expression of interest. That's very powerful. It's not a legally binding document, it just says something like, I am willing and able to invest the sum up to $100,000 with Steff, in one of her upcoming real estate deals anytime within the next six months. Sign off on that, put the date on it, it's still not a guarantee, but that person is much more likely to invest with you when you've a deal than if they just said, Yes, I'm interested.

You talk about the lifetime value of an investor, can you elaborate on that? A lot of people don't think about that, and it's very important to know.

Let's pretend we're looking at one of your self storage facilities. The purchase price is $1.5M, you need to raise $500,000 and let's say you raise it in five $100,000 chunks. If I come into that deal with $150,000, and that gets me a quarter of the investor pool, then the question would be, how much is that asset going to be worth to Steff over the length of time that you're going to hold? Let's use a 10 year time frame just to have a book end. Over 10 years, what do you think the total gross profit on that property is going to be, the increased value in the property, the cash flow over that time, the mortgage pay down, all of these things? Let's say $2 million and let's say they get half and you get half. That means that deal is worth $1 million to Steff over that 10 year timeframe.

You divide that by the number of investors, five, so that's $200,000. That's what that investor is worth to you for that deal. Now, are they only going to invest in one deal with you? Let's say they invest in four deals, if the average profit that they're worth to you is $200,000 and now they invest in four deals. That's $800,000. Now, let's say they're happy with the investments they're doing with you, they will refer other investors to you, and that person would be worth something similar. That's the math that everybody should be thinking about.

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