Blog | Real Estate

How to Invest Using Other People’s Money (Successfully)

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Don’t be lazy. Look beyond your own wallet to raise capital for your next investment

Imagine you have the opportunity to purchase an old, but classic 10-room boutique hotel that’s about to go into foreclosure. But there’s something missing. Could it be … cash?

Or let’s say you have a small business you want to start or you have an existing business you want to grow, but you need an injection of money to take you to the next level. You call a few people you know outside the company as potential investors, but how do you persuade them to invest in you and your business?

One more scenario: A woman you’ve met on several occasions approaches you to invest in a privately run wind-energy company that’s been operating for five years. You’ve got the cash, but what do you need to know in order to decide if this investment is right for you?

Raising capital, also known as OPM—Other People’s Money, is a must-do in the world of investing. But iIt’s also one of the most intimidating parts of starting out as an investor.

The power of using Other People’s Money (OPM)

One of my absolute favorite business strategies is using other people’s money (OPM) for my investments. If you’re not familiar with the concept, it’s one of the cornerstones of the Rich Dad philosophy: looking beyond the limits of your own resources and finding sources of money elsewhere.

Sadly, many people only look to their own wallets and bank accounts to fund their businesses and investments. Today I know this is pure laziness. Don’t worry, I, too, once was lazy. The good news is that it can be cured! But how?

First, let me share the story of how I came to learn about using other people’s money to leverage my way to financial independence. It was a dear friend and mentor of mine, Frank, who said to me, “Kim, you know that only lazy people use their own money.”

Very confused, I said to Frank, “No, no, no. I work really hard to make the money and then I invest it.”

He laughed at me and countered, “Wouldn’t it take more thinking and more creativity to use someone else’s money instead of your own?”

Hmmm, at first that sounded completely unrealistic. But the more I wrestled with the concept in my head, the more I realized Frank was absolutely right.

You see, it was easy to use my own money to buy whatever asset I had my eye on, but I’d have to learn new skills and strategies to persuade someone else to part with their hard-earned money to put into my investment.

Financially free but not yet professional investors

It’s important to understand the difference between how Frank viewed raising capital compared to how I viewed raising capital early in my investing career.

I was conditioned my whole life to live below my means. I brought that same mindset about my personal finances into the investing world.

To better explain the difference, let’s use the diagram below. We refer to this simple graphic as the CASHFLOW® Quadrant. Robert’s rich dad used the CASHFLOW® Quadrant to explain the four types of people in the world.

The CASHFLOW Quadrant graphic

On the left side are the Es and Ss. Regardless of whether they work for a company or run a sole-proprietorship, these people exchange their time for money. On the right side of the quadrant are the Bs and Is, these are the “Business Owners” and “Investors.” Though there are many other differences between people on either side, it’s knowing how to leverage other people’s time and money that makes the biggest difference.

Even though Robert and I had already made the leap from the left side of the CASHFLOW® Quadrant to the right side through our businesses and investments, we were still young as professional investors. The short conversation I had with our mentor Frank was one of many lessons he taught us about how professionals not only know how to make money with money but ultimately know how to make even more money using other people’s money. Once we were able to complete deals using other people’s money we finally made the leap from professional investors to true capitalists.

Where I went wrong my first time raising capital

Traditional lenders are requiring you to jump through more and more hoops, plus they are requiring larger down payments and stricter terms. Many private lenders and investors are more cautious and have raised their standards as well. What’s a woman to do?

What I learned, through trial and error, was that raising capital isn’t really the mystery many make it out to be. More than anything, it’s good common business sense that will prevail. It’s often said that the key to raising capital is a person’s ability to sell. Selling is a crucial skill for any entrepreneur or investor. When it comes to raising capital, the question is, “What are you selling?” In other words, what is the lender or investor looking for?

Even though it was difficult, Robert and I were still able to raise a quarter of a million dollars among 10 investors. And in the end, every investor got their initial investment back and made an excellent return on their money. The “sell,” however, was much more difficult, because:

  • I didn’t know what the investor was looking for

  • I relied solely on my persuasion skills and friendships instead of sound business sense

What I didn’t know at the time was that there are four factors that are critical to raising money. Because I wasn’t aware of these four gems, so much of my sales pitch to prospective investors was based on sheer determination.

What a lender or investor really wants

Here’s the answer to the big mystery: Lenders and investors (such as banks, private organizations or individuals) simply want to know that they are going to get a healthy return on their investment. If they give you X dollars, then how much money will they get back? They want a good ROI.

A presentation need not be long or complex. It will differ, depending on the business or investment involved. Often, when a pitch is short and concise, it reflects that the presenters are confident in knowing what the investor wants and secure in knowing that they can deliver it.

So, the key to raising money comes down to four fairly simple factors that will help demonstrate the ROI they are seeking. I’m going to help you cut right to the chase with my efficient formula:

If you are raising money for an investment, then what exactly is the investment, and what makes this investment so attractive that I should place my money in this one versus another investment?

Remember, it’s easy to tell a prospective investor all the positives; but be sure to be realistic and honest; this means there may be some negatives of this project as well. Have a plan ready for how to overcome challenges and keep it moving.

Keep it simple. Keep it concise. Keep it real.

Imagine you’re the investor; what are critical pieces of information you would need to hear in order to have faith in your investment? This is common business sense; whatever experience the partners bring to the table will directly influence the level of confidence in your investors.

  1. Project

    When presenting the project, ask yourself these questions: What is the project the lender is providing you capital for? If it’s for your business, then what exactly is your business? What makes your business unique from others in your industry? And what is the advantage your business has that will build confidence in the investor that it will be successful?

  2. Partners

    Who are the key players in the project? What is the track record of those partners? What experience do they have? In other words, who’s putting the deal together and what success have they had? The experience each partner brings to the table, and thus their expertise, is a big part of the equation.

  3. Financing

    Show the investor, as accurately as you can, how the project (either a business or investment) will make money. Be realistic and don’t avoid discussing the roadblocks ahead—every business and investment project has problems, so pretending yours won’t makes you look like an amateur. You’ll want to show how much money you’re raising in total, where the money is coming from (private parties, traditional lenders, etc.), the terms of the money being borrowed and how the money will be allocated.

    Hint: If you even suggest that any of the money raised will be used to pay your salary, doors will close. If you want a paycheck, then get a job. Potential investors want to know two things:

    1. How soon will they get their initial investment back? And

    2. What their return will be.

    These numbers will determine if your financing structure and terms are attractive.

  4. Management

    The historical saying is, “Money follows management.” I agree. Investors want to know who’s running the day-to-day operations, because this is crucial to the ongoing success of any venture. Explain who they are, their background, how they react under pressure, etc.

If you are starting your own business or if you’re raising money to grow your existing business, then the partners and the management team may be the same people. That’s not a problem at all if there is experience and expertise in the team that will fuel confidence in the investors.

When it comes to commercial or residential rental properties, management is key. It is the day-to-day operations of an office building, a retail strip mall, a single-family house or an apartment building that will make or break your bottom line.

In summary: how to invest with other people’s money

I know it can seem intimidating at first, but raising capital does not have to be a long, drawn-out affair. Your pitch to investors should be short and concise. If you can clearly and confidently address each of the four aforementioned issues when looking to raise capital, then the odds of securing the financing you seek are in your favor. Now, the only thing left for you to do is deliver!

To get started with some guidance, download your copy of Rich Dad’s eBook, How to Buy Your First Investment Property for free.

 

Original publish date: November 16, 2017

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