The 5-Step Process to Raising Capital in a Recession

The COVID-19 pandemic has thrown the country into an unexpected recession. According to financial experts, the current recession started in early March. Unlike the great recession of 2008 which started in the financial markets, the current recession is due to a public health crisis. The current recession is considered the deepest since World War II, but because the economy was strong going into it, it will probably be one of the shortest recessions as well. The faster the U.S. can bring the virus under control, the faster the recovery will be.

While the pandemic is causing problems around the country, syndicators are still looking to purchase multifamily properties. Raising capital in a recessionary period is not easy, but it can be accomplished if you act right. I’ve heard people say, “Find a good deal and the money will come.” That isn’t true now, nor has it ever been, and that includes raising capital during a booming economy.

I’ve put together a 5-step process that I use to raise capital during a volatile market. I’m sharing it with you in the hope that it will help you raise the capital you need for your next deal.

Step 1: Always be Raising Capital

If you only engage investors when you have a deal to share, you probably won’t come up with the capital you need. I’ve learned that you should always keep an open line of communication with your investors and prospective investors, constantly building relationships with them. That way when you do have a deal to share, they are more likely to invest with you.

You’ve often heard the expression “out of sight, out of mind.” It’s especially true when working to build relationships with investors. You also have to remember that other syndicators are constantly trying to reach out to your investors. That’s why you have to be constantly present so that they don’t end up jumping ship and going with someone else. It’s just good business sense, and it’s why you should always be raising capital.

If you reach out to investors on a continuous basis, you’ll build top-of-mind awareness with them. Share recent deals you’ve completed, projects in progress, or other news of interest to investors. If you have a website and are posting blogs, email the investors with the current topics you’ve posted. The point is, when a deal does come along, you won’t be coming at the investors out of nowhere, as you’ve been communicating with them all along. They’ll be far more likely to respond than if you hadn’t been in touch all along.

Step 2: Address Investor Concerns

You should always address concerns that investors have and be open and honest with them regardless of the topic at hand. Don’t hope that your investors won’t be thinking about what could possibly go wrong, because they are. The COVID-19 pandemic is on everyone’s mind right now and is in the news constantly. Address the main possible concerns they might have right away, before they even have a chance to express them. It’s a lot more powerful when you own the situation and address possible objections, than react to them after they have been expressed.

Some key issues you’d want to address are “why invest now, during the COVID-19 pandemic?” Or, “what if we can’t raise rents once we acquire the property and do our value-add improvements?” Another one to address is, “what are the main issues or problems that we might face?” You get the idea. By addressing all of the issues upfront it helps you build credibility and trust, making investors more likely to invest with you when you have a deal.

Step 3: Be Creative

Syndicators who are creative in their approach to investors are more likely to get commitments and participation than those who aren’t. For example, you can create two groups of investors; the first group participates in the property’s cash flow from operations (rents, fees, etc), with no participation in the sale proceeds when the hold period is over (generally in 3-5 years).

The second group would receive slightly lower cash on cash returns but would participate in their share of the sale proceeds when the property sells. By doing this, you can cater to different investors based on their unique view of the market, their cash flow needs, and their desire to be willing to wait for a payoff when the property sells.

Another option is to add a flex-equity split that would change the actual numbers if the property doesn’t perform. Equity splits are very common in real estate syndications. With a straight equity split, investors are given a defined percentage of the property’s cash flow and equity on sale, often defined as “60-40” or “70-30.” The first number is the amount that goes to the investor, the second number is the percentage that goes to the syndicator.

With a flex-equity split, the deal can be set up as a 70-30 split, but if a 14% IRR deal ends up performing at 13% the split would convert to a 80-20 one. This gives an extra incentive for the syndicator to ensure that the deal performs as anticipated, while providing the investors with a cushion if it doesn’t.

Another way to be creative is to use new technology to stay in touch with your investors. Most syndicators have a large number of investors, and the new technology will allow you to help target specific investors for a specific type of deal. You can classify investors by specific categories, like amount of money available to invest, type of property, location of property, and more. It helps to streamline the contact process, which will save the syndicator a lot of time.

Step 4: Keep Investors Informed

This is a good approach regardless of the economic climate, but it’s even more important during an economic crisis or a pandemic, as we’re experiencing now. Investors don’t like being kept in the dark, and that’s especially true when they hear news all day long about the economy and COVID-19.

Reach out when you’ve made progress on a specific deal. This could be when you get a discount from the seller, or when you have received new information on rent collections. It can also be when you want to share news about businesses in the metro area that are reopening, or when restrictions have been lifted. Investors crave news about potential impacts on their investments, so by sharing news you’re helping to alleviate stress and concerns.

How should you keep them informed? Try sending out emails to your investors, but be sure to individualize them with a personal intro. There are many templates available to you that allow for personalization, so it won’t look like a mass mailing. Posting updates on your website is another way to keep your investors informed, and you can email them a link that takes them to directly your website.

Step 5: Be More Proactive

Now’s the time to step up and be a lot more proactive than you were before COVID-19 hit. If you were used to having investors reaching out to you after you sent out a presentation or held a conference call, change things up and reach out to them proactively. Whether you text, call, or email your investors, getting in touch shows your interest

There are a variety of ways you can stay in contact with your investors. Texting each one is personal and is often very well received. Holding a group conference call is another way to keep connected and let investors know what is happening, not only with the deal but with the multifamily market in general.

Also, consider a personal phone call to each investor. Is this time consuming? You bet it is! And depending on the number of investors you have on your roster, it can take a while. However, I can tell you from personal experience that it is one of the best ways to build and enhance your relationship with your investors while keeping them informed.

Finally, consider meeting face-to-face with key investors. This can be as simple as a cup of coffee or having lunch or dinner. Nothing bolsters or rekindles a business relationship like meeting in person. It also helps prevent investors from becoming complacent to your other methods of contact.

Summary

Raising capital in a recessionary period or during a pandemic is difficult, but not impossible. I’ve developed a 5-step process designed to make the process successful. First, always be raising capital - never wait for a deal to contact your investors. By staying in continuous contact with them, sharing information about your deals and your business, they’ll be more likely to respond to you when you have a deal to share. Always address their concerns and be open and honest about the problems everyone is facing. Talk about the issues that they will face and offer solutions. Be creative – offer alternative equity splits to various groups of investors, for example. Also, use new technology to save time and stay in touch with your investors. Keep investors informed, the more information you can share, the better. Discuss projects, things that are happening in the metro area where the property is located, and other key information that will keep them engaged. Finally, be more proactive. Stay in constant touch using email, texting, personal phone calls or face-to-face meetings. Other syndicators are going after your investors and by being proactive you can help alleviate the risk of investors going with a different syndicator.

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About the Author

Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

Ellie is the host of REady2Scale , a podcast that focuses on the "APS" of real estate: Asset, Process, and Strategy. Each episode discusses how investors can scale their real estate portfolio and/or businesses.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com.