5 Hot Tips for Successful Real Estate Investment

The last downturn of the global stock market saw millions of ‘every day’ investors having their fingers badly burned. Overnight life savings were eaten away, retirement funds went into decline and the economic forecast for all of us who had any money invested in stocks and shares was gloomy to say the very least.

As a direct result investors in their thousands turned their backs on the rollercoaster stock markets and sought alternative asset classes in which to invest their hard earned money. This has led to a global boom in real estate markets and property prices, and it has spawned a generation of budding real estate investors.

For those of you wondering whether it’s too late to venture into real estate investing or considering how best to make the most significant returns from property investment, here are 5 hot tips for successful real estate investment to set you on the path to potential profits!

1) Consider Investment Property Abroad

There are many relatively untapped property markets in countries around the world that offer the real estate investor greater return on investment in the form of rental yields or short to medium term capital growth.

While major markets in the USA, UK, Australia and Europe are slowing down, there are emerging property markets globally that are hungry for investment and are proving to be highly profitable.

For example, in 2007 a number of countries are already aligned for accession into the European Union and as a result property markets in these countries are likely to benefit from greater numbers of visitors, more trade, increased investment into infrastructure and more stable economies. The likes of Hungary, Slovakia, Bulgaria, Croatia, Turkey and even Northern Cyprus are just a few examples of overseas destinations with emerging real estate markets that may be worthy of your consideration.

2) Make Sure Your Plans Are Profitable

This sounds ridiculously simple right? Well, you’d be surprised how few people actually make sure their plans are actually sustainable and as profitable as they hope.

Examine any real estate market that you’re about to enter by firstly comparing property values across the city, state or region and making sure you know what your money will buy you. Then ensure that the rental yield you intend to obtain from your property is actually realistic or that the asking price you intend to set once you’ve renovated the property will be offered.

3) Never Assume Anything

This goes from assuming a house is structurally sound to accepting that tax laws won’t change – from believing your tenants when they tell you that they are house proud and honest to accepting the first builder’s quotation!

Do your due diligence on every single aspect of the process from ensuring the asking price for a property is fair to checking your tax returns before your accountant submits them for you. This is your investment, your future, your potential profit and therefore it is ultimately your responsibility.

4) Employ An Expert When In Doubt

Few people are a master of all trades therefore be prepared to acknowledge areas where you are far from being an expert and at least consider courting a second opinion. Again, this goes from checking out the structural soundness of a property to understanding the legal ramifications of letting out your property. If in doubt always double check – and if this means you have to call in an expert, make sure you call in an expert!

5) Set A Realistic Budget And Stick To It

Whether you’re purchasing property to let out or buying real estate to renovate you need to sit down and add up every single area of projected expenditure to enable you to set a realistic budget with which to work.

Make sure you add in everything from having searches and surveys conducted, legal fees, accountancy fees, insurance costs, likely interest payments on any finance required, taxation, connection of utilities, marketing for tenants or buyers, real estate agency fees, and of course don’t forget to add on the cost of the property and the price of any renovation and refurnishing and decorating work required.

Spend time considering every single area where a cost will be incurred and detail every likely payment that will have to be made and you will arm yourself with a bullet proof budget and do all you can to ensure you encounter no nasty surprises along the way.

5 Top Tips For Raising Investment In Your Company

If you want to grow your company then one of the best options is to raise more finance to support that growth. However, raising finance doesn’t come without risks. You need to make sure you know what you’re getting into and, more importantly, how to get out.

The biggest challenge most business owners face is how to even get started on raising finance. So here are 5 top tips for raising investment in your company.

1. Have a great business plan

Although it’s true that many investors don’t even read the whole business plan this doesn’t mean you can ignore it. A great business plan is an essential part of your business and going through the process ensures that you think about all the different elements of how your business is going to work. It’s no good having great expectations on sales if you haven’t thought through how you’re going to market the business to generate the leads to convert to sales. A business plan gives you focus and allows you to cut away those elements of the business that obviously don’t make sense.

An investor will be looking to the business plan to show that you have considered, researched and planned your business. You don’t have to produce reams of paper but you do need to show you’ve given serious consideration to all the critical factors in your business and market. And make sure you know what’s in your plan.

The plan alone may not be enough to raise the money but it’ll be a whole lot harder without it.

2. Be realistic in your forecasts

There’s nothing worse for an investor than scratching the surface of a prospective investee’s financial forecasts and finding there’s nothing but hot air, hyperbole and broad assumption.

Every investor has seen plans that say something along the lines of “if we can get just 1% of this £8bn market, then we’ll have revenues of £80m”. And those plans and forecasts have a tendency to go straight to that great shredder in the sky. Be realistic and show that you have some valid justification for how you’re going to reach the numbers you’re forecasting.

If you have marketing spend (and you should) then show how that translates into sales leads and how those get converted into sales. Create financial models that underpin the numbers. If you’re expecting to convert 75% of all prospects then you had better have a fantastic justification for how and why. Most businesses simply don’t achieve this sort of conversion rate and you will lose credibility very quickly with this type of assumption.

The reality of business is that even with realistic forecasts, sales usually take much longer to be achieved and costs are usually much higher than expected. An experienced investor will look at your forecast and check that they still work with half the sales and twice the costs to check the risk in the business.

If you’re going to build your forecasts yourself then educate yourself in the best approaches and if you’re going to get others to help then make sure they have the right knowledge and experience.

A solid forecast won’t guarantee investment but a shaky one will receive a definite “no”.

3. Show the investor what return they can expect

The best investors only invest when they have a high certainty of the outcome. Successful investing is about knowing what return you expect to make. Anything else is speculation and gambling. When an investor puts money into a business they want to know what they’re going to get and when.

As part of your plan and forecast, you need to build in a realistic and achievable exit strategy. This allows the investor to get their money out, with a decent return on it.

Many investors, private equity firms and VCs will invest in a portfolio of companies. They go in with the expectation that each one will succeed but they know that overall some will and some won’t. The trick is to ensure that the gains on the good ones more than outweigh the losses on the bad ones. To do this they will often be looking for a return of between 3 and 5 times their investment within 3 to 5 years. Different investors have different criteria but this works as a general rule of thumb.

The return on the investment for the investor is really determined by 2 things. How much they put in and how much they get out. That’s why investors will push for more equity for their investment, as it increases their potential return on exit.

If you can show a decent return, in a reasonable period, to the investor then they’ll be more inclined to back you. If you can’t then they’ll take their money elsewhere.

4. Practice your presentation

It’s said that investors invest in people and this is most obvious when a business owner presents their business case to prospective investors. You may have the greatest business proposal and CV in the world but if you can’t string 5 words together in a sentence then an investor will lose a lot of faith in you.

If you’re not used to presenting then it can be scary. If you’re not used to the tough line of questioning that can sometimes come from investors then that can be daunting. And if you haven’t prepared then you’ve effectively blown it before you’ve even walked through the door.

Investors are not ogres, although some are quite curt and don’t like wasting their time or concentration. So you need to prepare carefully, anticipate and address the areas of potential concern, listen to their questions and answer them clearly, succinctly and honestly. If you do all this then you’ll have a much stronger chance of succeeding in raising investment.

If you prepare and practice and build your own confidence in what you’re presenting then you stand a much greater chance of being financed. If you try to wing it and expect to convince investors with the sheer force of your personality, charm and cheesy sales techniques then a used car lot awaits.

5. Know what you want and what you’re prepared to give

This may sound obvious but it’s the cornerstone of any negotiation. And this is a negotiation from the very beginning. You need to be very clear about what you want and be willing to walk away from the table if you can’t get it. You also need to understand that you won’t get something for nothing and know what you’re prepared to give which could include an equity share in your business, security on your business assets and your own assets, commitment to pay high interest rates on loaned money and covenants that will obligate you to frequent detailed reporting and the potential to have all your assets and your company taken away from you.

Now if all that hasn’t scared you off yet, then you also need to be aware that an investor is probably going to be looking to get more than you are prepared to give and you’ll end up in some element of negotiation.

You need to understand what the investment will do for your business, and what will happen to the business without it, and decide whether the sacrifice of equity is worth the investment.

You’ll also need to consider what it will really mean if the equity given for the investment hands ultimate control of the business to the investor. That’s a serious step and needs to be taken very carefully.

Ultimately, although you want to negotiate, you need to be realistic about what you are asking for. In proposing an equity share for an investment you’ll be assigning a value to your business. And that value will be challenged, so be prepared to back it up. Investors get very tired of business owners trying to convince them that their start up company with no sales warrants £1m of investment for 10% of the business. It’s unlikely you’ll be able to justify a £10m valuation on an empty space, a few bits of paper and a big dollop of enthusiasm.

If you know your desired outcomes and you can justify them, you’ll be in a better position to negotiate. If you’re walking around in a dream then you’re likely to get a rude awakening.

If you’re not sure on any of these areas then make sure you get some professional help. It’s a lot better to invest some time, effort and money up front to get the right approach then to waste many months and even more money learning the hard way. Think about what it costs you personally for each month that your business growth is inhibited. When you look at it this way, getting the right support in early can save you a lot more in the long run.

Tips on Venture Capital Deal Terms – Part Two

I will be discussing Venture Capital Deal Terms from two different perspectives, Business Venture Capital and Angel Funding. As I go through each subject below I will point out the nuances of dealing with each type of investor. Some of the differences are minor others are significant.

Keep in mind that not all investors fit the same mold. There are great differences in deal structures from one Angel investor to the next, and likewise with VC firms.

1. Term Sheet. At the end of your Business Plan you may want to include a Term Sheet with the Deal Terms that your Management Team is comfortable with. Better to include the Term Sheet when you are talking with Angel Investors. It is not necessary to include one when dealing with a Business Venture Capital Firm. They will usually dictate the terms and financing structure anyway.

Investors will not commit to a Term Sheet without conducting due diligence. So don’t try to get them to commit, just use it to weed out investors who may waste your time. Try to prevent potential investors from conducting extensive due diligence on your company, for their own benefit. For instance, maybe they funded one of your competitors and are simply on a fishing expedition.

If your company has been operating you need to determine its book value. Ask your accountant to help you with this. Then offer Angel investors a percentage based on the book value and the amount of funding you are seeking.

If your company is a pure start up then focus on the percentage of the company you are willing to sell for X dollars, rather then a number of shares. Your Management Team needs to be in agreement on what they are willing to give up if they get the full amount of funding they are looking for.

Here are some questions the Team needs to agree on:

Will they give up voting control?

Will they agree to accept another Director to the Board?

Will they agree to the funding being secured by all the assets of the Company? Will they agree to an anti-dilution clause?

Will they agree to a reverse merger and become a public company in six months?

2. Anti-Dilution Clauses. If the Management Team feels that strongly about its business model or the company’s revenue potential, offer investors an “Anti-Dilution” clause. I would not offer it to a typical Angel Investor unless it was able to close the deal and get you the funding. In other words, use it as a carrot to close the deal.

On the other hand, most Venture Capital investors that provide the first round of financing will probably demand an Anti-Dilution clause. If you offer it first, it will show your confidence in carrying out your business plan and achieving success.

Don’t put it in the Term Sheet though, hold it until you are fairly certain they may fund. Then you can offer it, or at least not be so surprised, when they require it for investment protection.

3. Super Preferred Stock. Use a Super Preferred Stock issuance to give your Management Team voting control. If a Venture Capital firm requires majority stock ownership, you may be able to maintain voting control. Make the Super Preferred non-convertible into common stock.

It works something like this: Management would own 1,000,000 shares of preferred stock with voting rights of 20 votes per share for 20,000,000 votes. So if management owns 4,000,000 shares of common stock, but Angel investors own 6,000,000 shares, management still controls the company. The preferred stock holders would be entitled to vote on any matters on which the common stock holders are entitled to vote. This would include electing the Board of Directors, increasing the number of shares authorized and other corporate governance matters.

If the investor does not like the idea of the super preferred you can always discuss their concerns. Maybe they are worried that Management may increase the number of directors or drastically increase the number of common shares, thereby diluting the investor in a second round of financing. You can always “carve out” or limit the use of the Super Preferred.