How To Raise Capital For Your Real Estate Projects
Steve Byrne is founder of EquiSource and has been in commercial real estate investment, management, and finance for nearly 40 years.
getty
Reliable, profitable and widely available, real estate is an excellent investment choice. The benefits of real estate investments, from tax incentives to reliable rental income, are clear.
You may be concerned about how to raise capital for real estate investments, but it’s easier than you think. There are many ways of securing capital, and you can find one that will work for you in this article.
How Do I Generate Capital For Real Estate?
As a real estate investor, you want capital sources with a proven track record. There are six options that investors tend to use:
Bank loans
FHA loans
Hard and private money loans
Peer-to-peer loans
Wholesale
1. Bank Loans
These are some of the most popular approaches to funding a real estate project. With today’s low interest rates and strong real estate market, this traditional option continues to be appealing.
There is some red tape associated with getting a loan through a bank. Your lender will evaluate your debt-to-income ratio, credit history and assets before agreeing to offer you a loan. To get approved for a loan, you will need a strong credit score, a reliable income and minimal debt.
2. FHA Loans
If you are looking for a home and an investment opportunity all-in-one, an FHA loan is a great choice.
3. Self-Directed IRA Accounts
4. Hard And Private Money Loans
5. Peer-To-Peer Loans
Loans From Friends & Family
Like so many other options on this list, you cant borrow money for a down payment if youre using a conventional loan. But if youre borrowing a portfolio loan, lenders usually allows it.
Your parents, siblings, aunts, uncles, friends, grandparents are all viable sources to borrow from, to help you accumulate the down payment for your next investment property.
And theyre not likely to rake you over the coals on interest or fees, either. As with seller financing, all terms are negotiable.
One other perk: the debt wont appear on your credit report, and the lender may not include it when calculating your DTI .
Just make sure you confirm that the portfolio lender youre using allows it, before begging your family and friends for a loan!
Get An Fha Loan For Your Real Estate Investing
This suggestion catches a lot of up-and-coming real estate moguls off guard. Thats because conventional wisdom says that FHA loans are only good for houses you intend to live in. This is contrary to most peoples real estate investing ambitions.
However, as it turns out, there is fine print in FHA terms that enables real estate investors to purchase multi-property dwellings of three units or fewer so long as they inhabit one of the units.
This means you could get a loan right now that would require less than 4% down. Plus, this would net you up to two cash-flowing rental units.
Read Also: Can I Open An Investment Account For My Kid
Should Be A Good Year For Real Estate
The housing market in 2019 has been strong but slightly softer than last year, at 5.25 million existing houses sold. On the other hand, the year 2020 is projected to surpass the last two years in housing sales. Moreover, as any real estate professional will tell you, how housing sales go, the rest of the real estate market goes.
Fortunately, there are a lot of ways you can raise the capital you need to make a splash in the market. To this end, here are a few options:
How To Get Started In Raising Capital
The best way to get started in raising capital is to start organically talking about real estate investing with your friends, family, coworkers, neighbors, and anyone else who will listen.
Aim to understand their pain points and aspirations as it relates to money and finances, and tell them about what youre doing in the space.
And if you havent already, we highly recommend investing as a limited partner passive investor in another syndicators deal, so you can understand the process from the viewpoint of the passive investor.
Through the conversations you have, youll get to know whether this is the right fit and whether this is a viable business venture for you.
Read Also: How Do I Invest In Ripple
Private & Hard Money Lenders
Hard money lenders are organized semi-institutionalized lenders who are typically licensed to lend money to those in need. On the other hand, private money lenders are individuals with access to capital and a penchant for investing it. While these two types of lenders exercise subtle differences, they are unquestionably the most popular funding source for todays real estate investors. If for nothing else, these alternative funding sources have become the easiest and most direct source of capital for real estate investing.
As their names suggest, private and hard money lenders arent associated with institutionalized banks, and therefore arent subject to nearly as much red tape. Instead, these lenders tend to work for themselves and are usually actively looking to lend their funds to those in need. These lenders can award investors with short-term, high-rate loans based primarily on the subject property, thanks to their alternative nature. Otherwise known as asset-based lending, private and hard money lenders will base their decision to lend money out on whether the property in question appears like a worthy investment. That means investors dont need to have a perfect credit score to receive approval, but rather a good work ethic with an even better subject property.
How To Raise Private Capital For Real Estate
Private money lenders will often have their own set of rules and guidelines. While many will exercise similar practices, their borrowers criteria are different. I maintain, however, that there are several universal things private money lenders look for.
If borrowers can identify what it is their money partners want, its more likely that they will receive the loan. You see, lenders are in the business of making money, too. There are 6 Ps that you can remember when it comes to private money lenders. If you can give them the things I outline below, you could find yourself with the money needed to buy your next deal:
Protect their capital
Promote relationship building
Also Check: Best Place To Invest In Stocks Online
Provide Your Track Record
Of course, most investors expect to see a proven track record. They want to know that you can deliver on your plans. If you dont have direct experience in real estate investing, what other relevant experience do you have or who else can you partner with? Have your portfolio ready to go with your successes on top. Youve got to have the numbers to prove yourself.
Vendors Contractors And Sub
Working with the right vendors and sub-contractors makes a big difference in cutting costs. Some subs may have higher pricing but will show up when they say they will. Others might charge less but fail to perform, costing more down the line as you fix mistakes and your project gets delayed.
Look into the history and capabilities of each sub-contractor you plan to work with before signing any contracts. Due diligence is important if you want to work with people who can get the job done right.
Dont skimp out on the cost of hiring essential experts. Unless you understand every building regulation in the area youre developing, you need expert advice from architects, engineers, and similar professionals to make sure youre doing things in the right way from the start.
Fixing these types of errors is costly and time-consuming, and there may be fines attached for non-compliance or negligence.
“For contractors, you need to do your research up front. Look for contractors that are licensed, insured, and who have a track record of getting work done on time. Be on the lookout for shoddy jobs in their past and see how many satisfied customers they have for similar projects.”
Ask about maximum price guarantees and get quotes from multiple trustworthy contractors. If possible, speak to other real estate developers in the area to ask about their costs for similar projects.
Related: Real Estate Investing Explained: Fees
You May Like: Age For Investing In Stock
Ways To Raise Capital For Your Business
Need to raise some fast capital to build your business? You are definitely not alone. Every month, some 543,000 small businesses are started by people just like you with big hopes and dreams. In the earliest phases of developing a business and during times of expansion, the most common complaint is struggling with raising capital for business.
Lets face it very few people are born with a wealthy benefactor or have access to an unlimited supply of money. This can either hold you back or motivate you to find your way to the finances you need as an entrepreneur. Truth is, building a business is going to be the single most difficult and rewarding experience in your life. Letting a little thing like cash get in the way is not an acceptable excuse for not trying.
Fortunately, there are many ways to raise capital for your small business. Well start with some of the traditional methods of increasing your cash flow, and then surprise you with some more modern ways. But first, lets determine how much capital you need, which will then guide you to the right sources of additional money.
Raising Capital For Real Estate From First Time Investors
Hunter: Because if I get on a call with someone who is contemplating making their first investment in a syndication, my response is going to be very different than if someone has made 20 investments in syndications with five different operators. They’re thinking whether or not I should invest in my deal or some of my competitors’ deals. Should I be talking about debt service coverage ratio? Or, should I be talking about market dynamics?
Should I be talking about the difference between mobile home parks and self storage and whatever they’re investing in? Probably a little bit. The reality is, as much as we feel like the tactics and the specifics of our deals are what sells the deals. Anybody that’s experienced in this industry knows it’s all about the relationship. Setting that call-off on the right foot is far more important than the population growth of your market, for example.
Darin: Anybody that’s having investor calls, that’s great advice to structure a call quickly upfront. The other thing that I would say is you’re presenting an opportunity. You’re not asking them for money. It’s a mindset thing where some people are so afraid of, how am I going to get the money?
You May Like: Why Investing In Gold Is A Bad Idea
How Does Real Estate Crowdfunding Work
CRE crowdfunding allows multiple investors to pool their money and collectively invest in larger real estate projects than they could on their own.
As an investor in a crowdfunding deal, you, along with dozens or even hundreds of other investors, purchase a portion of interest in a property or real estate project, similar to owning shares in a company. Capital that is raised goes to the real estate developer to invest in building, renovating or recapitalizing the property, which generates ROI for each investor.
When You Get A Goose Egg From Raising Capital For Real Estate
Darin: I got to tell you when I was reading that story, I was expecting it to be a big number. Then all of a sudden you ended up with a goose egg. I was like, oh no. But you kept going.
Hunter: It was a really important learning lesson. I took about six months to recover from that emotionally. And I’m being serious. I almost didn’t move on with my career at that point because I envisioned how I thought this was going to go. I came from a great family. I’m from the United States, I have access to the internet, I was able to reach out to people in country clubs.
I had everything that you could possibly imagine for someone getting into the world of capital raising. And I fell flat. So, what did I do? What most people do when they fall flat in a capital raise. They think it’s them, they think they failed, they think it’s not for them. And they think it can’t be done. Then they start making excuses about why other people could do it and not them.
I recognized not only do I want to chase around investors and try to convince them. I never even want to present in a room with only 30 people or even only 30 million again. For the last 10 years, I’ve built an infrastructure to attract hundreds of thousands of people.
Capture thousands of emails and nurture them through automated sequences through internet marketing, et cetera. Marketing tactics generally that are very intentional. And now, we’ve raised tens of millions of dollars from hundreds of investors.
You May Like: How To Invest In A Roth Ira Account
How To Structure Your Investment Offering
There are an infinite number of variations you can take when deciding how you want to compensate investors for their capital in your deal.
The most common question I get:
How do I structure my deal so that its attractive to investors?
Well, just like your particular investment, one size does not fit all.
Here are a few different ways to structure your investors returns:
Federal Housing Authority Loans
FHA loans are government-sponsored loans that incentivize people to purchase a home by offering a borrowing option in which the buyer needs to put down only 3.5%. The FHA doesnt loan the money it guarantees the loan for the lender. Since the FHA takes on some of the financial risk by insuring the payment of the loan if the borrower defaults, its easier for borrowers to qualify for an FHA loan than a conventional loan, and the lender is able to offer a competitive interest rate.
Recommended Reading: Columbia Business School Value Investing
How To Make Money In Real Estate And Get Rich In 2021
July 10, 2021 by
There is no shortcut to make money or get rich quickly in real estate, but you can slowly and steadily build wealth by investing wisely. You would know that there are many different ways to become rich but real estate is one of the best ways to build wealth. Having said that, making money in real estate takes the right advice, systems, and determination. Investing in real estate stands out as a tried and tested approach to make money but like every other business, it has some risks associated with it.
If done the right way, real estate can be a great source to build wealth if you take the time to educate yourself about the process and the best ways to get great returns. If you have cash , it’s much easier to get started in real estate investing. But the truth is many entrepreneurs start their businesses including real estate investing with very little money every day. Many of them just get off the ground by dreaming big and putting in a lot of effort.
Buying a rental property that loses money every month in hopes of a future appreciation is a bad investment. The positive cash flow doesn’t only enable you to pay off the property but it also contributes to saving for another down payment to buy your next investment property sooner. The more properties you buy, the more you can save, and the faster you can achieve your money-making goals through real estate investing.
Raising Capital For Real Estate From Reinvestments
Hunter: Or at least, many of the decisions they’ll make within that time period will likely dictate how the rest of the call goes. If that’s an investor call, that can mean the difference between $100,000 being invested or it not being invested. In fact, it can mean far more than that, because like we were saying previously. If you had the opportunity for someone to invest with you, it could be the case that they’ll reinvest with you over and over again and potentially refer their friends.
In the book, I talk about the first five and 30 seconds being really important moments. Number one, scrub the neediness from your voice and your tone immediately, prior to even the call starting. But more importantly, I want to recognize before I get on a call with them that there are trillions of dollars in the world invested in negative interest rate bearing bonds.
It is not just me and BiggerPockets and Darin. We have a macroeconomic situation where the United States real estate is one of the most favorable investment vehicles in the world. In the history of the world as well for all the reasons that we can get into, but you have access to these deals. You have access to what they want.
You May Like: Investment Property Loans No Money Down
Using Crowdfunding To Fund Real Estate Investments
Crowdfunding is a new way of funding real estate investment that is slowly becoming more commonplace, particularly with millennial investors. Investors using this method get access to a pool of funds that doesnt require direct contact with other investors and that has a more diverse investor group. Some crowdfunding platforms even allow cross-border investing, which can give investors outside the US the opportunity to get exposure to local real estate markets. Crowdfunding can also make real estate investing more accessible and affordable. Many new online platforms have launched around this idea, allowing investors to share their investment opportunities easily with an online pitch.
The big draw in crowdfunding stems from being able to get funding for a project quickly with little to no upfront fees. Pitching your project on a crowdfunding platform can additionally be a valuable type of marketing tool. Real estate projects listed on these platforms typically gain a lot of exposure quickly.
One caveat of crowdfunding is that these platforms do not necessarily guarantee that the investor will raise all the capital they need or that the investor will meet the criteria to be able to share their property. Different platforms can have different requirements and vetting processes, and there are also some regulations surrounding the crowdfunding of real estate before the investor is able to get started. The most prevalent method of real estate crowdfunding is based on equity.
