This one thing allowed me to double my portfolio each of the last 3 years, scale from STRs into boutique hotels, and recently helped me close my biggest boutique hotel to date, which is bigger than my previous 5 hotels COMBINED!
This one thing might sound simple, but it’s the biggest lever you have to scale into boutique hotels – or any business for that matter.
So what is it that can take your STR business to the next level?
Well, you might think that it’s finding a killer deal, and if you do that the rest just falls into place. While that’s part of it. The best investors who scale into large deals know that there’s one key factor to unlimited growth.
And that is bringing in outside capital and raising money from investors.
Once you can cross that bridge and bring in investors to your deals, you take the cap off your growth. And most of the time what I see, and transparently what I have experienced myself, is that it’s a mental bridge you need to cross. The actual skillset and actions you need to take to raise capital are relatively simple. But it’s a big mental hurdle. So then you spend 6 months working up the courage to START something you could have completed by then.
And one of the best ways I heard this put, that totally changed my thinking about raising money was at the Maui Mastermind last year I was talking with Brandon Turner overlooking the ocean and the resort we were at, and we were discussing growing our real estate businesses. And he said something that stuck with me. He said raising capital is always your ultimate limiting factor for growth. All the other areas of your business have dials that you can turn to increase the output. You need more deals, you turn the dial then screen and offer on more deals. You will get more deals. If your units are having trouble renting – adjust your rates, do promotions, turn on paid ads – you have dials to turn up to get your units rented. You can do ALL of that and more to increase the output of your business, but if you can’t raise money then there is always going to be a ceiling to your growth. There’s not a simple dial to turn to get more cash because you have to go out and raise it. But if you can increase the amount of capital you can raise, you increase how far and how fast you can scale.
And I’ve experienced this. I had to pass on a deal last year because I couldn’t raise the money I needed to get it closed. I was also really stretching myself, it was a 15 million dollar hotel deal. But it’s a perfect example because that was a stretch for me, but maybe the stretch for you is your first hotel deal that’s $1M or $2M. You still have to be able to raise the cash to close the deal.
I think this is a good point to bring up the age-old chicken and the egg problem of: do you find a deal first or find the money first? I have personally found, at least on smaller deals, that if I found a great deal, then I could find the money. But having now scaled up to bigger commercial properties, I think there’s a limit to that. It’s easy to find $100k or $200k to close a single-family BRRRR deal. That’s one person, one investor. But when you’re talking about closing a potentially million-dollar hotel deal where you might need 1M dollars PLUS for your all-in costs for the down payment, renovation costs, and reserves. That’s hard to find from one person, so you’re likely going to need multiple investors. And just by the nature of needing MORE people, that complicates things and it takes more skill, reps, and time to convince more investors to invest with you.
And I’ll tell you the story of my first big raise on my first commercial deal to highlight this. When I started, I quickly went to raise money from private investors because I wanted to go FAST. And that worked great. I was able to find a great deal and find one investor to invest with me in it. That was the smooth part, as I just mentioned. But when I got my first apartment complex under contract, I needed to raise about $500k. And I thought hey – no problem! I’ve raised about that much already on different deals, I got this! But that first raise – with a new strategy (going from single family to commercial multifamily), and a bigger amount – was hard for me. Our minimum investment was $50,000 on that deal, so I needed 10 people to invest to hit $500k, not just one person like I was used to. So I talked to everyone in my contacts, I hit up my whole network, I made phone calls and Zoom calls and lunch appointments, but I was coming up short. It was because the scale of that raise was bigger than I was used to. And I’ve heard that same story plan out with almost everyone I know on their first big commercial raise. But I’ll tell you what I know now that I didn’t know then, to help you flatten that curve.
So because of that, I think the best approach is to throw the chicken and the egg dilemma out the window altogether. And instead of focusing on either raising money or finding deals, you do BOTH. You raise money WHILE you’re looking for deals. Because you need both pieces.
And that takes us into how you go about raising money.
The by far easiest way is also the most straightforward way. And that is: Tell people what you do. That may sound overly simple. But we have to start somewhere. And this is one we often discount or overlook because it is so simple. But if you don’t tell people what you do, they’ll never know, and then they’ll never invest with you. Go back to Brandon Turner as an example, if you know him then you probably know his real estate company Open Door Capital. And that is because he “told” you about it. Whether you knew it or not. He may have told you on a podcast, on his Instagram, in his Behind the Beard newsletter, or in an ad, but if you know about it – it’s because he told you. He’s the champion of his business out there telling the world and growing awareness and telling people what he does so he can connect with the people he aims to serve – passive investors looking to invest in multifamily apartments and mobile home parks. If you want to raise money, you have to do the same for your business. You don’t have to start a podcast, or start a newsletter, but find YOUR way to tell people what you do.
Maybe one of the most straightforward ways is to create a simple website for your brand or your business make an “invest” page and link it to your bio on your social media. Then talk about what you do on social media in a way that is valuable to your desired audience. Don’t just spam whoever will listen, but deliver value with intention. That content serves as the top of the funnel to get people to your website to fill out a form about investing with you. You can check out the link in my bio for an example, or Brandon’s, or anyone who raises money for their real estate. And you use that invest page to build your list, which we’ll keep diving into because it’s an important part.
The hard part about building your investor list is getting investors to sign up to be on your list. There are a million ways to do it, and you can be creative with it. One of the best ways is with Lead Magnets. And all a lead magnet is, is a piece of content focused on your ideal audience, in this case passive investors to invest in your boutique hotel deal, that serves them in some way. Your goal with a lead magnet is to add value to the audience. It might be something like “5 tips to passively investing in hotels”. You then create those 5 tips to deliver as much value as possible and make downloading it contingent on people adding their name and email address. That’s it, that’s all you need – a name and an email. Then you can communicate with those people directly and share deals and opportunities to invest when you have them.
And I’ll give you one of the best tips I can give you that completely changed how I raise money. It both made me more comfortable when pitching investors and made me more effective at converting investors. And that tip is to ask people for referrals. I think you’ll be surprised by how powerful this is. You aren’t asking people directly “Hey will you invest with me” but instead “Hey I’m doing THIS”, and a quick outline of what that is, and then “Do you know anyone who would want to invest with me”. This takes the pressure off of a direct ask and potentially makes people feel awkward. And I think most of the time people generally want to help and would be happy to connect you with a friend, uncle, or someone who may want to invest with you. If they say no it takes the rejection off of you. And here’s the magic part, a lot of times people will say, “Yeah, actually I’d be interested”. So make sure you’re asking for referrals.
Maybe the best way to create interest from passive investors where there was none before is to do a Content Campaign or start consistently creating content about what you do. This one has high barriers, mostly in your willingness and in your time. But with what I’ve found, if it’s important to you, you’ll find the time and get over your self-imposed barriers. Don’t let imposter syndrome stop you from going for your goals. All the people you see on social media talking about their businesses and what they do, and getting leads because of it, started as newbies. And the best part is, you can only go up from where you are now if you haven’t started yet. So what this content campaign can look like is an intentional campaign or content focused on your investing strategy through the lens of providing value to the viewers of your content. And you NEED a lead capture mechanism. It can be as simple as a Calendly link in your bio, or directing them to your “invest with me” page. But you want to get their contact information so you can reach out to them and communicate with them directly.
A super tactical thing that you can do is to get on other people’s podcasts. By being a guest on other people’s podcasts you can share your journey and your expertise and get exposed to a new audience of people who don’t yet know you. You expand the awareness of yourself, and what you do. And then again, have a way to capture leads and connect with people who reach out. Because if you go on a podcast and deliver value, you’ll have people who do.
You could also create your podcast. This might be the best way if you can get over the barrier to do so. Hosting a podcast is great because you can bring other more experienced people on your podcast and not only learn from them but get exposure to their audience as well. And because you are already recording the podcast, you can take that recording and snip it up into shorts post those on social media, and repurpose the content that you are already doing. So you sit down to record a podcast but then might get an additional 5 pieces of content to post from that which helps the first point – you telling people what you do and generating top-line awareness of what you do.
And of course, there are the tried and true methods of meeting people in person. You can go to conferences, local meetups, and networking events. I think you should always be aiming to expand your network and meet new people. After all, your network is your net worth. So get out there and meet people!
Your goal with all of these different strategies is to 1) become known, and 2) become known for what you do – in this case, Raise money from passive investors for high-yielding short-term rentals boutique hotels that have amazing tax benefits. To make all of this work, you need to have a way to create and capture new leads – the people who reach out and may be interested in investing with you.
Your goal should be to get to know these people, which is best done by setting up a phone call with them. If you are trying to raise money, have your lead capture funnel into your Calendly link to set up a 30-minute phone call with them where you can get to know the person, and their investment goals, build a relationship with them, and share what you do and how you can help. Again, you are trying to add value to them. And ask questions and listen more than you talk. If you are trying to hone your skill of pitching people and converting them into investors, I’d recommend you read the book Pitch Anything by Oren Klaff and Getting the Money by Susan Lassiter-Lyons. Those books have helped me raise a ton of money. And remember to always present the investment as an opportunity rather than asking for money.
Now let’s get a little tactical on how you determine how much to raise and how you raise because there are different structures for different deals. I hear all the time, how much are hotels or how much should I spend on one. We’ll talk about some rules of thumb when looking at deals in the next video, but the truth is, it varies a lot. I’d pay $150k/door all day in a market like Tahoe, whereas $150k door in Panama City Beach is the very top of the market. So it just depends on where you are buying. But once you get familiar with screening and analyzing deals you’ll know a good deal when you see it, and then you can put in your offer and start raising money.
The first way you can raise money for your hotel deals is my favorite when you can use it, and you’ll find out what I mean because it keeps you in control of all the upside. And it’s probably the easiest – and that is a debt raise. This is when your investors don’t have equity, so all the upside is yours. You give your investors a promissory note, or they get a mortgage depending on the state, but in either case, it secures their investment in the property, similar to the bank’s debt.
With a debt raise, the investor earns interest on the money they invest, just like the bank would because both are debt. And you can use this in conjunction with a mortgage from a bank, and use promissory notes from investors for the down payment and repairs. Then when the renovation is done, and the property is stabilized, you refinance the property and return the investor’s capital with interest. It is the BRRRR strategy, but in commercial real estate – so a BBRRRR or big BRRRR. So what this looks like in practice is you’d go get a property under contract, get bank financing for, say, 70% of the purchase price, and then raise debt from investors for the down payment and repairs. If the property is $400k, you’d get bank debt for $280,000, or 70% LTV. Now if your repairs are $100k, you’d need to raise $220,000 from investors ($120k for the down payment and $100k for the repairs).
You could raise that from one person, or a couple of people. The general guideline is that you can bring in 4-5 people, though it’s not a hard and fast rule. But the reason there’s a limit is because if you bring in 10 people, you’re likely offering security. That makes it more advanced and gets you into the SEC world when you are offering securities. So because boutique hotels are more expensive, this limits debt raises because you’ll need to raise more money, and it’s hard to find that from only a handful of people – not impossible, but more difficult. But the good thing is, there are more ways you can raise more money without offering security.
One of those is through Partnerships. And that is simply where you partner with other people on the deal, and they’d get equity for whatever they bring to the deal, in this case usually equity. And sometimes it’s easier to get a bigger check writer or someone who can bring a bigger check writer by giving up equity. And my stance on this is pretty simple – 50% of a good deal is better than 100% of no deal.
And because you are scaling up and going bigger you are likely going to be stretching the limits of what you can do yourself. I’ve used partnerships in one way or another on all but one of my commercial deals, and I think they are a great way to do a bigger deal that you couldn’t do yourself. So partnerships are pretty simple – you give someone a percentage of the equity in a deal for what they bring to the table. And again, there’s a limit to how many partners you can bring into a deal, usually 4 or 5 and everyone has to participate in some way in the deal, and that’s hard to do with multiple partners. The perk is that you can usually get bigger checks because you are giving them equity, which incentivizes them to partner in the deal with you.
Another simple way to get a big chunk of capital needed for a deal is Joint Ventures. A joint venture is a business arrangement in which two or more parties agree to pool their resources to accomplish a specific task. In simple terms, it’s when you have something that another party wants and the joint venture partner that you bring has something you want, and you guys form a joint venture together to make the deal happen. So if someone has a lender that they can bring, or capital, or investors, you can joint venture with them to get the deal done. Both partnerships and joint venture agreements are pretty simple and easy to set up, and both are pretty cheap. You just need an operating agreement and your promissory notes for investors or a joint venture agreement drafted up and you are off and rolling.
And here’s the cream of the crop where you can start to put together big deals and raise big chunks of capital from a lot of investors. This is where you syndicate, meaning you pool money from a group of investors to jointly purchase a large real estate property. This is where you get into the realm of offering a security and you’ll need a real estate and SEC attorney to structure this deal which is the exemption of a public offering. But it also opens up the world of big deals, which is the fun part.
The most common structure for syndication is a 506(b) where you can bring in up to 35 sophisticated (non-accredited) investors but cannot advertise your deal. This is commonly called the friends and family raise, since you can’t advertise you raise money from people from your network that you already know.
A 506(c) raise is where you can only bring in accredited investors but you CAN advertise your deal. Which one you choose depends on you and your network but in my experience and what I have seen most people start with a 506(b) because you can bring in friends and family and those from your network and they do not have to be accredited, so the barriers to getting investors is lower. 506(c) raises can be harder for newer investors because you have to figure out how to advertise and can only raise from accredited investors, which can be limited if most of the people you know who might invest are not accredited. To be an accredited investor a person has to have a net worth of $1M or more, not including their primary residence or they have to make over $200k per year, or $300k per year if they file their taxes jointly with their spouse.
These are the main ways you have to bring outside capital in for your deals and throw gas on the fire to how far and how fast you can grow. As I mentioned earlier, capital is always your limiting factor. Start with adjusting your mindset to recognize and accept that you will need outside capital to grow if your goal is to go big. And to do that you need to make yourself know and create and capture leads of potential investors, and present them with the opportunity and benefits of investing with you. So if you can figure out this piece of investing, you can go as big as you want. And maybe you’ll be competing on a boutique hotel deal with me 😉
