Theo will get into some creative ways that people will raise money with 506c offerings. It’s always a good idea to hear as many different ways to raise money as possible, you never know when you’ll need another way to get capital. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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TRANSCRIPTION
Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.
Each week, every Wednesday and Thursday, we release Syndication School series on the Best Real Estate Investing Advice Ever Show Podcast. They’re also available in video form on our YouTube channel as well. Each of these series is focused on a specific aspect of the apartment syndication investment strategy. For the majority of the series we offer some sort of resource for you to download for free, whether it be a PDF file, a PowerPoint presentation template, an Excel calculator – something for you to download for free to help you in your syndication journeys.
This episode is going to be a standalone episode, entitled “Five ways to raise money with a 506(c) offering.” These tips come from a syndicator who raises money for development deals, and he focused on 506(c) offering type, as opposed to the 506(b).
A quick rundown of those differences – we do have a Syndication School series that focuses on that, which you can find at SyndicationSchool.com, searching “506(b) 506(c).” The main difference between the two is that with 506(b) offering the money-raiser (sponsor, GP) must have a pre-existing relationship with the passive investors, whereas for the 506(c) you can raise money from strangers and advertising for your deals are allowed.
This episode is going to be five ways to essentially advertise for money from investors. Again, this comes from a developer; his name is Mark, and he actually developed over a billion dollars’ worth of deals before he started transitioning to raising money for his deals.
So these are the five ways to raise money with the 506(c), and before I go any further, keep in mind – obviously, we’re not attorneys, so when you are raising with money with 506(b) or 506(c), or raising money for some other offering type, make sure you consult with a securities attorney to make sure you are following all of the proper laws.
Number one is crowdfunding. The first way Mark uses to obtain new investors is through crowdfunding. He says “For every deal we do, we do a portion of it crowdfunded, which is really nothing more than just advertising online through one of these third-party platforms for new investors.”
You likely know what a crowdfunding platform is. If you want to learn more about crowdfunding, we actually have a crash course available on our website. It’s episode 152, so one of the earlier episodes, entitled “Every single answer to every single crowdfunding question you have.” It’s a four-part podcast; I believe it’s four parts… And it’s Joe interviewing the people over at Patch of Land, which is a crowdfunding site.
So essentially, what you do is you put your deal on a crowdfunding site. Mark doesn’t have a particular crowdfunding site that he thinks is best. At the time he used CrowdStreet, there’s also Patch of Land… If you just google “real estate crowdfunding” you should be able to find one. Go on their website to find the procedure for posting your deal on their website to generate money.
Mark said that a benefit of crowdfunding is that he can find investors that he would not have been able to find otherwise. He says “These are people that I would otherwise have never met in my life, that are interested in investing with us, and some of us have already invested with us. It’s a great opportunity to grow your network of individuals that either might be interested or are definitely interested in investing.”
Since it’s online, he can get his deals in front of people all across the United States, people that he might not have found through one of these other four tactics I’m gonna go over today. The crowdfunding for Mark is basically filling in the gaps and just making sure that his deal gets in front of as many people as possible. So that’s number one, putting the deal up on a crowdfunding site.
Number two is Facebook. For a recent project, at the time we interviewed Mark, it was the first time he opened up his deal to Facebook. He said he was gonna try Facebook because “We’ve heard in the past a lot of great reviews from friends about how they acquired investors that way, because you can be super-targeted.” We know very clearly that 90% of our investors are 40 years and older, live all over the country, but mainly in population centers of 100,000 or more…” So Facebook advertising allows you to hyper-target a specific audience. Mark knows his passive investor demographic – in this case 40-year-olds who live in population centers of over 100,000 people, so when he creates his Facebook advertising, he types in 40 years old age, location – population over 100,000; other factors to target would be educational attainment, so people that have a college degree, and then people who are working professionals: doctors, lawyers, executives and small business owners are also their criteria.
So Facebook advertising in general could be a great way to generate leads no matter what you’re doing, but when you’re allowed to raise capital for your deals, you can explicitly use the Facebook advertising function. You don’t have to be subtle about it, you don’t have to [unintelligible [00:08:15].03] The way that they would use Facebook is creating content and displaying their expertise, answering questions passive investors have, with the goal of directing them and pushing them up their funnel into capturing their contact information and then talking to then, building relationships with them, and then raising money that way… Whereas for 506(c) you can forego all of that and just go straight to “Hey, here’s a deal that we have. Do you wanna invest?” and you don’t have to worry about not advertising and being subtle about it. So that’s number two, Facebook advertising.
Obviously, for the Facebook advertising there’s a dollar amount associated with that; pay-per-click, or other charges… So make sure you take that into account if you are gonna use Facebook advertising.
Number three – and this is kind of unexpected, but the way that Mark explains it, it definitely makes sense… They advertise their deals in newspapers. Mark puts up advertisements in local newspapers. You guys know what newspapers are, right? So Mark says “We are also trying old-school newspaper advertising, because our investor base tends to be a bit older. In some cases we have investors 70, 80, 90 years old, and newspaper still happens to be a very relevant source for those people.
In this case, Mark is thinking about what his target demographic uses. As he mentioned before, the average age is about 40, but he does have investors who are 70, 80, 90+ years old, and those people are likely not using the internet. Obviously, they’re on the internet, but they probably still like their tangible newspapers, and magazines, and maybe even TV to get their information.
So just focusing on crowdfunding and just focusing on Facebook you’re gonna miss out on some opportunities because of the demographic that isn’t on Facebook, or isn’t on crowdfunding websites. They don’t know how to use those websites. So Mark got around that by putting his deals in newspapers.
For a recent deal they did, they took out ads in North and South Carolina for a deal that was in South Carolina. He says “I’ve taken ads out in markets that are very close to these areas. Charlotte is in our way, Greenville is about 45 minutes way, Charleston… Those types of things, because people tend to like investing locally. Even though long-term I that’s a bad strategy, it’s a great gateway if they can drive by the property and see it.”
Mark is saying that from his perspective only focusing on deal locally isn’t the best strategy if you wanna grow your capital, but that’s how people tend to think; they want to invest in something that they can actually go drive by and see. So he’s advertising in these newspapers because people like a tangible thing to read their news.
Similarly, they want to actually see the property; they’re maybe not okay with investing in a deal all the way across the country, at least not right off the bat. Maybe they can be convinced to do so based on the returns. And he was explaining to them the ways you mitigate risk of investing out of state… But to find these first-time investors through the newspapers, they are more likely going to invest in the local area. So if you’ve got a deal, in this case in South Carolina, then you’re gonna wanna focus your newspaper ads in North and South Carolina, rather than taking out an ad in California to get the most bang for your buck. So that’s number three, the newspapers.
Number four are webinars. So in addition to crowdfunding, Facebook and these newspaper ads, the fourth thing that Mark does to generate money from passive investors using the 506(c) offering is to host webinars. In adherence to the “Be everywhere” blanket or carpet bomb marketing strategy, you wanna advertise on as many platforms and have as much marketing as possible. That obviously makes sense from a cost standpoint.
Mark says that “The webinar was helpful because we get one-on-one questions, we get a bunch of people and interest built around that specific concept of hosting a webinar, and you can record it and then send it out to others… So it gives you sort of a platform and another contact point to reach out to investors.”
So as you know, we’ve talked about the new investment offering conference call that you wanna host if you’re doing the 506(b) or 506(c). If you’ve got a new deal, you create your investment summary and then you present the deal, you go over the highlights of the investment summary in this new investment offering conference call, which of course, is a Syndication School episode – both of those, creating the investment summary and the how to make a new investment offering call; that’ll be at SyndicationSchool.com. And in fact, for the investment summary we provide you with a free PowerPoint presentation to use as a guide to creating your own.
The conference call obviously is just audio. The webinar is going to be audio and video. And he’s saying that he’s creating these educational webinars directed at passive investors to get people who are interested in passive investing to come into the webinar. For example, maybe he is advertising on Facebook and in newspapers, and then once he gets a lead from there, he directs them to either a live webinar or a recorded webinar, and then from there they get a little more comfortable, they know a little bit more about the deal, about the business plan, about the team, and they end up investing in one of the deals… Which is why it’s important to do this in combination with the other three methods – the crowdfunding, the Facebook and the newspaper ads are generating leads, and then you’re pushing the leads to your webinars so that they are more comfortable investing in your deals.
Lastly, number five – and this really holds true for raising money using any offering type, and that is referrals. Mark’s final strategy is the good old-fashioned referrals. He says that “The referral is probably in everyone’s experience why you start you with your friends and family, because they know you; if you perform for them, they will refer you to their friends and family, and so on and so forth. That’s been typically the best source for us overall.”
So you can do referrals for 506(b), just making sure, again, that you have to create a relationship with that individual before you bring them on as an investor, whereas for 506(c) all you need to do is get the referral and you can automatically bring them on as an investor. So if someone comes to you through a newspaper ad, for example, they invest in one of your deals, you hit all your return projections, they’re happy, they tell their brother, their sister, their best friend about you, and they reach out to you and say “Hey, I wanna invest”, you can take their money right away; you don’t have to worry about building a relationship with them.
So referrals – obviously a great way to have that snowball effect where you’re bringing in all these leads from crowdfunding, from Facebook, from newspapers, you’re pushing those leads to your webinars, they invest in your deals, and then those people, rather than you having to find more people through the previous four methods, they just refer their colleagues to you, they invest in your deals, then they refer people, and so on and so on.
So the referrals are obviously something that you always wanna focus on, and think of ways to generate referrals. Mark says that when he’s finding investors through referrals, the most effective method he’s found to generate these referrals is through social proof. So Mark says “What I’ll try to do is some of the family offices that didn’t know each other – I introduce them to each other. Now they know each other, so when I say ‘XYZ Family Office is investing, don’t you guys want to invest as well?’, they go ‘Oh yeah, of course. If they’re invested, we’ll do it, too.’ So there’s a little bit of trying to get people in the same room, or some social network of some sort, even if it’s just because I introduced them, so that there’s that social proof aspect where people feel obligated or inclined to invest because of someone else.”
That’s why the referrals are so important, because they’re already getting the proof of concept, the social proof from their friend. So Bob invests in Mark’s deals, Bob likes Mark’s deals, Bob likes the returns he’s getting, Bob tells Bill “Hey, you should come invest in these deals. I’m doing it.” Bill says “Oh wow, if you’re doing it, I trust your judgment, so I’m definitely gonna invest in these deals.”
On a larger scale, what Mark is saying is that he has a family office investing in one of his deals, and he wants another family office to invest in the deal; rather than going to them directly and maybe sending them a webinar, or just sending them a sample deal explaining them the ins and outs of the deal, explaining their business plan, explaining their team – instead, he just gets the family office that’s already investing in his deal to meet with his other family office so that he can provide social proof to that other family office. So if this one family office is investing, they’re getting the returns that they want, well then why wouldn’t XYZ family office also invest in that deal? Because it’s working perfectly fine for this other family office.
So those are the five methods for raising money and generating private capital using the 506(c) offering. Again, 506(c) – allowed to advertise; 506(b) – not allowed to advertise. So if you are doing 506(b), then you can’t use these strategies specifically, but you can still use referrals, you can still use webinars, you can still use Facebook. Newspapers – you can probably figure out a way to do that. Crowdfunding probably won’t work, because you can’t explicitly advertise for your deals… But these do work for 506(c), because you are allowed to advertise.
Again, if you wanna use newspapers, Facebook, crowdfunding, webinars, referrals, whether you’re 506(b) or 506(c), make sure you run your marketing strategy by your securities attorney first, before you implement any type of strategy or marketing plan.
Alright, that concludes this episode. Again, it’s “Five creative ways to raise money with a 506(c) offering.” Until next time, check out some of the other Syndication School series about the how-to’s of apartment syndication. I mentioned a lot in this episode, so you could start with those… Or you could start from series number one and work your way through. I think this is series 30 or 31, so we’ve got a lot of them that you can listen to… And for most of those there are also some free resourced for you to download.
All of those episodes and free resources are available at SyndicationSchool.com. Thanks for listening, have a best ever day, and we’ll talk to you tomorrow.
