Raising Money on the Equity Side: A Guide to Attracting Equity Partners

Welcome back to Assisted Living Investing! I’m Brett Chotkevys, and today we're diving into a crucial topic for real estate investors: raising money on the equity side. In this guide, I will share my insights on how I successfully attracted equity partners for my latest project, which involves developing a neighborhood of memory care mansions.

The Project Overview
In my current venture, we acquired eight acres to construct a unique neighborhood consisting of four memory care mansions, each spanning 10,000 square feet and featuring 16 bedrooms and 17 bathrooms. With an estimated cost of $2.25 million per building, the total investment will exceed $10 million. While I secured bank financing for the majority of this amount, I sought an equity partner to cover the down payment and fill the funding gap.

Understanding Equity Financing
When we talk about raising money on the equity side, we mean bringing on partners who invest capital in exchange for a share of the ownership. Unlike debt financing, which involves borrowing money against the property, equity financing allows you to bring in a co-owner who shares in both the risks and rewards of the investment.

Key Advantages of Raising Equity
Down Payment Coverage: One of the main reasons to seek equity funding is to secure cash for the down payment. Banks typically lend 80% to 90% of the total project cost, meaning you’ll need to cover the remaining amount. An equity partner can provide the necessary capital without the constraints of traditional loans.

Suitability for Larger Deals: If your project requires a substantial investment—like $200,000, $400,000, or even $1 million—it may be challenging to obtain that much through personal loans or debt financing. Structuring a larger deal with equity financing often makes it easier to attract investment without overleveraging yourself.
Investor Appeal: Equity partnerships can be more attractive to potential investors. Many investors prefer being part of a profitable venture rather than just lending money. If you present a compelling opportunity—like building a profitable memory care mansion that could generate $40,000 to $50,000 monthly—they will be eager to invest.

Structuring the Deal
When bringing on an equity partner, clarity in roles is crucial. I typically differentiate between an active partner—who manages the business—and a money partner, who contributes capital but remains less involved in day-to-day operations. This separation ensures that the active partner can focus on operational success while the investor provides financial support.

Personal Guarantees
It’s essential to discuss personal guarantees early on. If you secure traditional financing, banks usually require you to personally guarantee the loan. The same could apply to your equity partner, depending on their ownership stake. Generally, if an investor holds more than 20% equity, banks might require them to sign a personal guarantee, exposing their assets to potential risk.

If your partner prefers not to assume this risk, consider structuring their equity stake below 20%. However, for larger investments, you may need to negotiate higher equity stakes, ensuring they are compensated for the additional risk.

Timing Your Equity Partnership
You might wonder when is the best time to bring on an equity partner. You can do this before or after acquiring the property. For example, if you secure a takedown loan or use your own cash to purchase the property, you can later bring in an investor to help cover costs associated with permitting and construction.

Conclusion
​Raising money on the equity side is a powerful strategy for real estate investors, especially in larger projects like my memory care mansions. By understanding the benefits, structuring deals effectively, and timing your partnerships wisely, you can create win-win scenarios for both you and your equity partners. If you’re looking to finance your next project, consider the equity route—it might be the key to your success!