Christian Osgood lays out three rules before raising private capital for real estate: know yourself and your financial discipline, know your market's rents and job growth, and know your numbers including cash flow, cap rates, and vacancy rates. He emphasizes matching deal structures to investor goals and being able to explain your analysis simply.
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Hey YouTube, it's Christian Osgood back for another solo video today. Today's topic is raising private capital, what it means for you, and how you responsibly steward other people's money. There's 3 rules that you have to keep in mind. You got to know yourself, you got to know your market, and you need to know your numbers. And you have to have a mastery of those. So first of all, knowing yourself. Both Cody and I had a mentor early in our career who did not know themself. And so when they would raise money, they would raise it on a promise of, "Hey, we're going to give someone X return." However, they got confused over their money and their client's money. And that is not a position that you want to be in. When you raise money and don't have the ability to pay it back because you bought yourself a new car or a new house. It's not your money, and you have to know that about yourself. If you're just not good with money, raising private capital is not for you. Work really hard, learn how to save, buy some of your own deals, but don't use other people's money if you are not in a position. To steward that money responsibly. Number 2, knowing your market. Now, Cody and I really stress this. You need to buy deals that cash flow. You're not going to lose a property if your tenants can pay all the debt service and the maintenance and associated expenses. So don't compromise on cash flow. But location will be the largest factor in appreciation. Appreciation is where you start multiplying wealth. So while we can't control everything about appreciation, we can influence that by choosing the right location. Things you need to know here are: what are market rents? What is market income? Who's creating the jobs? What does job growth look like? Have you driven the streets? Are the roads all cracked and in bad repair, or are they paving roads now when you drive through the city? Are they building up or is stuff getting more run-down? You need to have a mastery of your market because that will help you deploy capital in the right places and help secure your investor's investment. 3. Knowing your numbers. For you to know how much you can promise for a deal cash flowing, you really need to know your real estate math. You have to have a very accurate projection of how stable are rents, what should I factor for vacancy, What are my taxes and insurance costs? It varies from market to market. You need to know how to input these numbers and calculate cash flow, projected appreciation. On commercial deals, that's going to be knowing your market cap rate. You need to know how to do all the math so you know: 1, how much cash flow you have day 1, and 2, how much equity you have at the end of your balloon payment. If you have a 3, 5, 7, 10-year balloon, you need to know how much the property is going to be worth so you know roughly how much equity you're playing with. Different deal structures— say you have a lot of cash flow. On a high cash flow deal, I can find an investor who wants to increase their month-to-month income. And if it cash flows 16% day 1, I can promise an 8% return with some upside, but I know there's margin there where I can make some money doing this deal on a cash flow basis. We have enough money as a buffer so we never lose the property, and the investor can consistently make their return. Now, on a play where there's not as much cash flow but there is a huge equity bump— say rents can really be brought up, or there's some rehab that we're going to do to bring up the value of the building— If cash flow is compressed, we never compromise that. So if I find someone whose goal is just to multiply their money, we're going to stack that on a larger buyout in the future, which is why we need to know the math on what it's going to be valued at, at that exit. If we promise them, for example, a 50% return on their money in 3 years, I have to know that in 3 years I'm going to safely cover that through the value-add. So, in summary, know yourself and that you can handle other people's money. And know that it's other people's money. 2, know your market. Know the location that you are putting money into and why you are doing that. And 3, know your math. Be so solid on the analysis of the deal that you could explain it to a kindergartner. If you can do these 3 things, you can start to raise private capital for deals. Now your focus is, I need to build the relationships to find the deal, and if the deal is good enough, know that there's enough money out there to raise capital for it. Hope this video was helpful. If you have any questions, please feel free to comment in the comment section. Cody and I are selecting 5 questions every week, and on Wednesday we'll answer your questions in our Whiteboard Wednesday. At some point, we'll probably even add a whiteboard to Wednesday. But I hope you find this helpful. Follow and subscribe for more, and we'll see you soon.
