Raising capital for real estate can be a challenge for many new investors, but it is a necessity for anyone looking to succeed in the industry.
The key to learning how to raise capital for real estate is to focus on identifying what today’s lenders covet the most (and give it to them). If you succeed, there is no reason you should not be able to raise the real estate investment capital you need for your next deal.
Other People’s Money (OPM) is what makes real estate investing possible for a huge percentage of aspiring investors. Even the most successful real estate professionals and legendary investors almost exclusively use OPM to reduce liability and maximize returns. As you can see, raising capital is critical for investors of every level.
However, both novice and seasoned real estate investors continue to struggle with making the connection between potential private investors and closing the deal. (Or even understanding how capital works with an alternative strategy such as tax lien investing.)
This is a shame, considering there is more real estate investment capital out there than ever before. Remember, private money lenders want to work with you, just as much as you want to work with them. Private lending has never been so attractive or widely accepted, and the benefits for you and your lender are endless.
Raising real estate investment capital is about more than a simple message or conducting a presentation that resonates. It must be more than a pretty website, thousands of inorganic Facebook friends, glossy folders, and a nice suit.
What Is Investment Capital?
Investment capital is the money used to fund a given investment deal. This can include the costs of acquiring a property, initial renovations, and upfront costs. There are generally two types of investment capital: debt and equity. Debt refers to investment capital that comes from hard money lenders, such as banks, and often requires interest payments. An advantage of using debt investment capital is that hard money lenders will not have a say in the company. However, many investors may find it difficult to secure capital with hard money lender. This is where equity (and OPM come in).
Equity refers to money secured by selling ownership in a property or business. Private money lenders may invest in a company if they see the investment as potentially profitable. Using equity as a form of investment capital has different pros and cons to utilizing debts, which is why it is crucial investors consider both options. For entrepreneurs ready to put the work in, raising private money can offer the chance to pursue a variety of investment opportunities and expand their portfolios.
What Are Money Partners?
Money partners are anyone you decide to work with to fund a given deal. When it comes to raising capital for real estate, money partners can be especially helpful because they can enable investors without significant amounts of capital to get started. Depending on the arrangement at hand, money partners can finance a deal, provide advice, and even share the risk of a given investment. Because of this, money partners are often highly sought after in the investment world. It is important to note, however, that partnering with other investors is mutually beneficial. Business partners stand to benefit from the success of a good deal just as much as you do, something that is important to keep in mind as you get ready to approach potential lenders.
Money partners exist throughout the real estate industry, though it is important to approach each potential investment with careful research and planning. It is not uncommon for even the most seasoned real estate investors to fail to close a deal with private money lenders or money partners. To ensure this does not happen to you, research potential investors you are trying to work with and put in the time and effort to ensure you are prepared every step of the way. If you are interested in learning more about how to find private money lenders or money partners, read this guide.
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, the criteria each requires of their borrowers 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, it is more likely that they will receive the loan. You see, lenders are in the business of making money, too. When it comes to private money lenders, there are 6 P’s that you can remember. 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
- Promise realistic returns
- Prove your potential
- Procure a great deal
- Provide your track record
- Promote relationship building
1. Protect Their Capital
The primary concern investors have is protecting what they have loaned out. If they lose that, they will not be able to make a profit – which is the whole point. That is why so many money partners have recently invested in low yielding real estate related products and ventures. When contemplating this factor, most look for collateral and how easy it will be to get their money back in the worst-case scenario. So be ready to answer these questions and have a plan B in your back pocket. It should go without saying, but the best way to work with a private money lender in Arizona and raise the real estate investment capital you need for your next deal is to convince them that it’s worth their time.
2. Promise Realistic Returns
Where most real estate investors go wrong when trying to raise capital is promising huge returns. If you sound overconfident, your presentation will automatically appear to be a “high-risk investment” or “scam”, which is certainly not the message you want to send. You will have to be above average market rates – of course – but do not project too high. The last thing you want to do is over promise and under deliver. Even if you think your goals are possible to achieve, start by underestimating and then deliver more later, which will create a sense of loyalty and reliability between you and your first line of money partners. If you tell them they will receive an ROI of 8 percent and they actually make 14 percent after all is said and done, you can bet they’ll put you at the front of the line in their contact database and beg you to take their money for your next deal.
3. Prove Your Potential
On the other hand, you need to make your investment sound appealing. Savvy investors with bigger pockets and heavyweight venture capital firms are of course turned on by the promise of big wins. So, while keeping projections conservative, do not be afraid to hint at the full upside potential – those big numbers you are hoping you’ll really hit.
4. Procure A Great Deal
Everyone wants a “deal”. There are two reasons for this. The first is that it is simply human nature. If someone thinks they are getting a good deal on a product, it automatically gives the impression of value. The second is that these individuals and money managers want to look smart and feel as though they are making a sound investment. They all have someone they need to impress. It could be their boss, their coworker, their spouse, a competitor, or even themselves. Regardless of who, your potential money partner will want to be able to boast about how intelligent they were to discover this high yielding or trendy investment before everyone else. Help them out.
5. 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 do not have direct experience in real estate investing, then what other relevant experiences do you have or who else can you find to partner with? Have your portfolio ready to go with your successes on top. You have got to have the numbers to prove yourself.
6. Promote Relationship Building
Surprisingly – or perhaps not so surprising – having a personal relationship between both investing parties trumps the rest of the qualifications. So how can you build more authentic relationships or find like-minded individuals – whom you might already know – that might want to work with you? This is one of the most important habits to acquire as a real estate investor. Try attending a local networking event to get your face out there. If you want to discover a potential money partner and achieve success, building and maintaining relationships is a must.
5 Tips For Raising Private Real Estate Capital
The best advice for raising private capital in real estate will vary depending on who you ask. The reason for this is that over time investors find the way of doing things that work best for their real estate businesses. However, this is not helpful to newbies. What I can say, is that it takes time to develop a surefire system for raising private capital. In the meantime—here are some tips to help you get started:
Use Your Own Money First: Before you start fundraising a new project, assess how much capital of your own you can rely on. Not only will this help you frame the budget for the project, but it will also lower the amount of cash you are paying interest on should you find a private lender. To increase your personal capital, consider redoing your monthly budget and reducing expenses for a while; you may even be eligible for a home equity loan.
Attention To Detail: The details included in your portfolio are going to make or break your pitch to Arizona private money lenders. Make sure you have an accurate purchase price, property value, rehab cost, rental value, wherever it applies to you. If this is your first investment deal, make sure the figures and estimates in your deal analyzer are as accurate as possible. Strong attention to detail could mean the difference in choosing a potential investment and securing enough financing.
Showcase Your Success: When you complete a successful real estate deal, do not be modest! Share the good news with your network, website, and social media following. Investors can and should showcase their successes (or wins) as they come along. When done right, this can help establish your credibility over time in the real estate industry.
Build Relationships: Networking is not as simple as exchanging business cards, and you should not want it to be. If you want to have a successful career in real estate, it is critical to building relationships across the industry. Keep up with your connections, celebrate their successes, and check-in from time to time. Building genuine relationships will help your career more than you can imagine.
Educate Others: Sometimes you may encounter potential lenders who are mostly unaware of the intricacies of a real estate deal, or the dynamics of private lending. That is okay, it could be the perfect opportunity to educate someone else on what you do. As you build relationships with other real estate professionals have conversations about lending and acquiring deals, share the resources you find helpful, and put people in contact with one another when fitting. This will help you build relationships (as I mentioned above) and potentially introduce investors to a mutually beneficial aspect of real estate.
Best Books For Learning How To Raise Capital For Real Estate
Raising capital for real estate has become one of the most discussed topics associated with real estate investing. If for nothing else, it’s the one concept anyone could stand to improve on: there’s never too much funding. As a result, there are volumes written on the subject of raising capital for real estate, and perhaps even more knowledgeable people talking about their own strategies just about anywhere someone is willing to listen. Truth be told, it’s not hard to find someone willing to offer their own opinion on how to raise capital for real estate investments; the hard part comes in distinguishing between those who are truly knowledgeable and those who are, for lack of a better word, ignorant.
It should go without saying, but incorrect information can be damaging to one’s career. Therefore, it’s important to gather information from trusted sources, not the least of which include:
Books: To this day, books represent one of the greatest ways to filter through the volumes of information made available to investors. However, the number of books one can find on raising capital for real estate can be staggering. Instead of sifting through everything, and risking learning from someone that may not know what they are talking about, save yourself some time and consult “The Real Estate Wholesaling Bible,” by my friend and business partner Than Merrill. As the name suggests, aspiring investors will learn how to wholesale real estate, but a large portion of the book deals with raising capital and funding. As a compliment, my own book, “The Real Estate Rehab Investing Bible,” will teach the reader the importance of raising capital for real estate and the best ways of going about doing so.
Podcasts: Relatively new to their written counterparts, podcasts are not to be underestimated. Oftentimes free, these downloadable audio files are filled with information from today’s top minds in the real estate industry. Get Wealthfit, for example, is a compilation of podcasts by investors who have been exactly where many aspiring investors hope to be one day. Get Wealthfit covers everything from money management to marketing strategies, and everything in between.
Blogs: Not unlike books, blogs offer knowledgeable individuals the ability to share their knowledge with the masses. Only, instead of releasing once every year or so, writers can publish blog content daily. Level 4 Funding blog, for example, publishes real estate content on a weekly basis. Once there, you will find plenty of content on raising capital for real estate, and just about everything else you may be interested in that has to do with the housing sector.
Raising capital for real estate does not need to be nearly as hard as many make it out to be. For those in the process of learning how to raise capital for real estate to remember, working with money partners is as simple as doing two things: learning what it is they want the most and giving it to them. It is the investors who can identify what today’s lenders are looking for that stand the best chance at getting the money they need for their next deal. That said, pay special considerations to the steps above, as they offer insight into what most today’s lenders look for in a borrower. Only when you can give a lender what they want will your chances of receiving real estate investment capital increase dramatically.
Is a lack of funds keeping you from investing in real estate? Do not let it!
Give us a call.
Level 4 Funding LLC
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About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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