For many real estate investors capital is the limiting factor on what, where and how many properties they can purchase. There are a number of ways to leverage the capital available in order to maximize your purchasing power, but two of the most common are through the use of equity partners and/or hard money loans.
Equity partners are people or groups who will partner with an investor on a project, bringing the cash needed to the table in exchange for equity participation and/or a flat or annualized rate of return. Most equity partners are going to want some kind of participation. Whether or not they also take interest will depend on the deal and the individual.
When we talk about participation we are talking about sharing profits. Taking on an equity partner who wants 50% participation means that you will be splitting the profit with this partner 50-50. While this may seem expensive, there are situations where this is beneficial. For example, if an investor is under contract on a profitable property, but has no cash on hand to close, taking on an equity partner may be a good opportunity to close a deal that otherwise they would not be able to. This same situation, however, may not be beneficial to an investor who does have cash on hand, which brings us to a second way many investors leverage their capital – hard money.
For investors that have capital to work with, hard money lending is an option that many use to leverage that capital. While hard money is not cheap, it is less expensive than taking on a partner as you do not need to give participation in the deal. The trade off is that it requires some capital to work with.
For fix and flip investors there are some pretty aggressive programs available via hard money. On our California rehab hard money loans for example, lending is based on the ‘as complete’ or ‘after repair’ value of a property. These loans will go up to 65% of that value.
The benefit to lending that is based on the after repair value is that it can allow for funding that is more than the purchase price of the property. This allows not only the purchase price to be financed, but also some of the rehab costs and interest payments. On quality deals investors with capital to work with can typically bring in 20-25% of the project cost cash and have the rest of the project financed, including the cost of the rehab work plus interest carry so they have no payments for the first few months (or longer).
These two strategies for leverage are fairly common in the real estate investing world. Which direction you may choose to go is typically going to depend on the amount of capital available to you. With little or no capital, taking on a partner may be a great way to get started or take on additional deals that you otherwise may have missed. On the other hand, if you do have some capital to work with, or want to leverage the capital you have, hard money lending provides an opportunity to do that without having to give up a portion of your profits.
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