Strategies for Raising Capital for Real Estate Funds
This report collects strategies for acquiring small investors for real estate funds amounting to $10 million to $50 million. Building an authentic brand as well as offering added value are both methods of establishing trust and are recommended strategies. Foreign investors are particularly interested in American investment opportunities due to COVID-19 and could be a viable market to target. Utilizing crowd-funding methods could enable Valiance Capital to reach its funding goal quickly. Findings from the initial report were included as requested.
Strategy: Build and Showcase and Authentic Brand
- Origin Investments raised $10.6 million in a single week of funding (separate from the more than $4 million it previously raised) in 2017.
- To raise that level of funds in that amount of time, Ben Harris, head of investor relations for Origin Investments shares the importance of building an authentic brand.
- Origin's three fundamental beliefs of being aligned with investors, honest communication of opportunities, and providing timely updates on investments is reflected throughout its website.
- Specifically, Harris points to how Origin has an upfront full disclosure on its fund feeds and provides "near real-time" updates on investments through its investment portal.
- Being transparent and touting this quality builds a brand's identity, which will ultimately sway decision makers in whether they should invest or not.
Strategy: Using Equity Crowdfunding
- Some companies are turning to equity crowd funding to quickly generate funding for smaller funds.
- Equity crowd funding can raise up to $20 million over 12 months at Tier 1, while Tier 2 companies can raise up to $50 million over 12 months.
- While there were previously restrictions on investors for Tier 1 offerings, those restrictions were removed with the JOBS Act and now anyone can invest in Tier 1 offerings.
- Non-accredited investors into Tier 2 funds can't invest more than 10 percent of their net worth.
- One of the oldest and best-known equity crowdfunding sites is AngelList. AngelList has generated over $1 billion in total funding.
Strategy: Appeal to Foreign Investors
- As a result of COVID-19, foreign investors are particularly interested in real estate funding opportunities focused on American properties as they are seen as being more resilient to pandemic-induced economic distress.
- Investors in China have been steadily investing into the U.S. market, contributing $350 billion to American real estate properties or funds from 2010-2015.
- Traffic to Roofstock from China increased 500 percent in March 2020 due to COVID-19 economic concerns. Traffic from Germany increased 450 percent, while traffic from Australia increased by 250 percent and those from the U.K. increased by 100 percent.
Strategy: Building a Relationship Through Added Value
- Providing added value to potential investors is an excellent way to convert leads and establish a relationship, advises Hunter Thompson, a member of the Forbes Real Estate Council and Managing Principal of Cash Flow Connections.
- Thompson's firm was able to raise $20 million in private capital from over 250 investors using this initial strategy to strengthen leads.
- Thompson added value to the relationship by driving traffic to a landing page that offers a free e-book to potential investors who provide their name and email address.
- The e-book should be about 10,000 words and readable in under an hour, providing concise and "significant value to the reader" and "mirroring your perspective on investing."
- Thompson offers his recent release, Little Boxes, Big Profits, as an example that can be followed.
Strategy: Give Realistic Expectations of Returns
- For real estate funds in general, giving potential investors a realistic expectation of what their returns will be is key.
- Having too much confidence or over-selling the potential return will prompt investors to believe that the fund is a high risk investment.
- The potential gains from underestimating returns and delivering more later are much greater due to fostering a better relationship with the client (and thus serving long-term goals for future investments).
Strategy: Connecting with the Audience
- In 2017, Origin Investment raised $4.4 million in a single week from 16 separate investors with high net worth.
- Part of Origin Investments's strategy was to connect with its audience, per Ben Harris, head of investor relations for Origin Investments.
- Recognizing that there are many investors scouring the internet for many investment opportunities, Harris recommends identifying and empathizing with this search and speaking to investors' pain points.
- New investors in particular may find the field intimidating and the potential for failure to be high, so firms that take the approach of being an informative and supportive ally in providing them with a greater understanding will have a better connection.
- Funds valued at less than $1 billion dominated the market share in 2015-2016 but have since become overshadowed by larger funds. Finding a way to promote the value of a smaller fund over a larger fund may be necessary.
- Real estate funds were struggling to raise capital in 2019 in part due to years of rising prices.
- While a substantially larger firm, Blackstone raised a record $20.5 billion in funds in Q3 2019. To raise such record funds in a slump, Blackstone created a diversified portfolio of funds with different strategies and goals to appeal to a wider swath of investors.
- Rental apartments (in domestic and foreign markets) are a market seeing a growing amount of funding from investors and would likely see higher returns on marketing investment.