Techniques & Strategies For Raising Real Estate Capital
Owning real estate has become synonymous with the American dream, and for good reason; almost anyone can do it. What is more: real estate is one of the best investment opportunities for individuals wishing to achieve financial freedom. The housing sector has continued to perform at a high level, and there is no reason people cannot get it on the action. All you need to get started is the right amount of passion, due diligence, and a sound real estate education. The last element missing from that list is capital. Have you ever wondered how to raise capital for real estate?
While capital is necessary to invest in real estate, there is no rule to suggest the money must come out of your pocket. You do not have to invest any of your own money at all. It is entirely possible to invest in real estate solely using other people’s money, or what I like to call OPM.
Having said that, if the money is not yours, to begin with, you must devise a strategy to attract investors who may be interested in funding your real estate ventures. To do so, you must learn to sell respective investors on yourself as much as the prospective property you are trying to take on.
The reality is venture capitalists are ready and willing to lend their money to those who can give them a solid return. Your mission, should you choose to pursue real estate investing, is to convince these investors that you can provide a solid return. Often, venture capitalists will gauge the viability of investment on one thing, and one thing only: you. As the person asking them for money, you must be ready to convince them beyond a shadow of a doubt that you are worth their time and money. Keep reading to learn more about how you can raise capital for real estate.
What Are Real Estate Ventures?
Real estate ventures are exactly what they sound like: entities that play an integral role in the development and financing of most large real estate projects. Joint real estate ventures, on the other hand, will witness two individual parties’ team up to take on a single project.
Investing in real estate ventures is one of the most profitable businesses among global investors. Real estate ventures can provide you several benefits including:
- ü Equity for the future
- ü High return on investment
- ü Cash flow for retirement
- ü Strategy for college funds
- ü Hedge against inflation
- ü Depreciation tax breaks
- ü Property appreciation
- ü How To Raise Money For Real Estate Investing 6 Different Ways
Real estate ventures need one thing, perhaps more than anything else: funding. Raising money for real estate deals is of the utmost importance, and it can be argued that it is the foundation of every deal. Therefore, investors must familiarize themselves with the most efficient ways to not only receive appropriate funding but also gain access to it in a moment’s notice. Note that learning how to raise capital for real estate is not as hard as it may seem — you just need to know where to look.
While there are plenty of ways to secure working capital, there are six sources investors have come to rely on more than any others:
ü Self-Directed Accounts
ü Private Placement Memorandums
ü FHA Investment Loan
ü Peer-to-Peer Loan
Hard money lenders are organized semi-institutionalized lenders who are typically licensed to lend money to those in need. Private money lenders, on the other hand, 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 source of funding for today’s real estate investors. If for nothing else, these alternative sources of funding have become the easiest and most direct source of capital for real estate investing.
As their names suggest, private and hard money lenders are not associated with institutionalized banks, and therefore are not subject to nearly as much “red tape.” Instead, these lenders tend to work for themselves and are usually actively looking to lend out their funds to those in need. Thanks to their alternative nature, these lenders can award investors with short-term, high-rate loans based primarily on the subject property. 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 do not need to have a perfect credit score to receive approval, but rather a good work ethic with an even better subject property.
In return for granting access to their capital, most private and hard money lenders will ask for approximately twelve to fifteen percent in interest, and perhaps even a few additional points (a form of prepaid interest). Understandably, their rates are much higher than traditional banks (nearly three times higher), but these lenders can award investors with almost immediate access to capital. Banks, on the other hand, may take a long as one to two months to provide funds. In the time it takes to receive money from a bank, most opportunities are already lost. Therefore, the speed of implementation granted from private and hard money lender has made raising capital for real estate deals much easier than in years past.
As perhaps the most overlooked—and perhaps even underutilized— source of capital, retirement accounts have served as an incredibly trustworthy source of funding for many of today’s real estate ventures. If for nothing else, far too many investors are unaware that they can even use their 401(k)s and Individual retirement accounts (IRAs) to invest in real estate. For what it is worth, the Internal Revenue Service (IRS) allows qualifying account holders to self-direct their savings into real estate investments without any sort of early withdrawal penalty. Of course, the account must be held by a custodian that allows account holders to self-direct their assets.
In the event their account can be self-directed, investors may use the funds in their retirement accounts to buy real estate. That said, any of the profits made must be returned to the account from which they originated. However, the profits will be permitted to grow tax deferred. Therefore, investors will not be able to spend the money immediately, but the resulting tax shelter can increase their profits.
Private Placement Memorandums
Easily the most misunderstood strategy for raising capital for real estate investing, private placement memorandums are, nonetheless, a great source of funding. As their name would leave many to believe, private placement memorandums are like private offerings. More specifically, however, a private placement awards real estate entrepreneur the ability to raise capital by selling securities to other investors.
While not traditionally viewed as a source of funding, the practice of wholesaling has developed a reputation for awarding savvy investors with relatively quick funds. Perhaps even more importantly, utilizing the assignment of contract strategy may not even require any upfront funds. Executed perfectly, it is entirely possible to make money on a wholesale deal in as little as a few hours without using any of an investor’s own money. That said, wholesaling is an exit strategy, and is by no means guaranteed, but with proper knowledge of the industry, a promising subject property, and a dependable buyers list, wholesalers may be able to flip a few properties and invest the proceeds in a rehab. While not a traditional source of funding, wholesaling will certainly help investors interested in raising capital for real estate deals.
FHA Investment Loan
FHA loans are backed by the Federal Housing Administration and were created to help low to middle-income Americans purchase houses. Given their original purpose, you may be wondering: can FHA loans be used to invest in real estate? The answer is yes. FHA loans can be used to invest so long as the property serves as the applicant’s primary address. Essentially this means using an FHA loan to buy a multifamily property and living in one unit while renting the others. These loans can provide a unique opportunity for buyers willing to live on-site to begin generating rental income. As far as specifics go, FHA loans do require a credit score of at least 580, as well as a down payment of around 3.5 percent.
A peer-to-peer loan is exactly what it sounds like: one investor loaning funds to another. This setup has become increasingly popular in recent years as more and more investors try to reap the benefits of real estate investing. Peer-to-peer lending typically takes place in an online marketplace setting. With most forms of real estate capital, the loan amounts, interest rates, and requirements will vary from lender to lender (and in this case platform to platform as well).
There are a few things to keep in mind as you learn more about the various platforms available. Always research data security, origination fees, and payback periods when considering your options. Research the details carefully to find the right platform and investor for your deal. Some examples to help you get started including Fundrise, Realty Mogul, Groundfloor, and Fund That Flip.
How To Secure Real Estate Investment Capital
Raising capital for real estate deals requires investors to know more than where to find sources; it also requires them to know how to secure the money once they know where to get it. Consequently, once investors have learned where to find the money they need, they must then learn how to appeal to those who have the money the need. Again, there are countless lenders simply waiting to lend their funds to today’s investors. However, it’s up to the investor to prove they are worth the investment.
Let’s take a look at some of the most important characteristics venture capitalists and private money lenders look for in those who want to raise capital for real estate ventures:
Show off your experience
Define your team structure
Explain the benefits of the opportunity
It should go without saying, but the more investors are comfortable investing in you as a person, the more likely you are to receive capital. Experience goes a long way in establishing credibility, and therefore in raising capital for real estate investments. Nothing can instill confidence in those parting ways with a large sum of money than experience; the peace of mind it creates cannot be underestimated.
However, the experience is not something every investor has the luxury of boasting. New investors, for that matter, have essentially no experience to offer at all. With that in mind, how can new investors compensate for a lack of experience?
It is important to note that even the most successful investors were once “green” behind the ears; nobody can boast years of experience right out of the gate. New investors are therefore advised to compensate for their lack of experience with preparation, knowledge, and acute attention to detail. You would be surprised at how far a little due diligence and drive can take even the most inexperienced investors. At this point, you must carry yourself with confidence; do not let your experience, or lack thereof, take centerstage on a given deal.
Venture capitalists and money lenders are looking to work with those that they feel comfortable giving their money to. If you cannot convince them with years of experience that you are the horse to bet on, do so by giving them peace of mind. Prove to those you are looking to borrow from that you have done your homework.
The best investors know real estate is a people business. Every single transaction requires the cooperation of at least two parties, if not more so. That said, if you want to learn how to raise capital for real estate ventures, you must work well with others, especially your team.
Private money lenders will place an emphasis on the rapport you have with your team, and for good reason. A competent team with the right leader is capable of just about anything. But what makes a competent team? What will money lenders look for in your team before they decide to give you the capital necessary to fund a deal?
Learning how to raise capital for real estate ventures starts with your team composition. Before you even consider asking for money, see to it that your team exhibits the following qualities:
Passion: The best teams exhibit a passion that is contagious. However, it is important to note that passion starts at the top and trickles down. To lead a passionate team, you, yourself, must be passionate about your future endeavors. Let people know how excited you are about the future of your company, and I guarantee people will be intrigued by the idea of working with you. At the very least, they will know your heart is in the right place.
Tenacity: Not all that dissimilar from passion, tenacity compliments passion and gives entrepreneurs the stamina to see their vision through to the end. Some say tenacity is all that separates a good investor from a great one. While the verdict is still out on that, there is no doubt in my mind that an inherent team tenacity can go a long way in convincing others to work on your behalf.
Flexibility: Entrepreneurs who are not flexible are inherently rigid. That said, rigid investors are more prone to suffering from complications because of their inability to adapt. Flexibility, for that matter, awards investors the opportunity to think on their feet and roll with the punches. The most prominent entrepreneurs of our time have all demonstrated an ability to be flexible; nothing has the power to mitigate risk quite like the ability to adapt to changing circumstances.
Commitment: Few things are more important to an entrepreneur than his or her team, and few things are more important to a team than commitment. Without commitment, even the most talented real estate teams can fall apart. As an investor, it is in your best interest to elicit unwavering commitment from those you choose to work alongside. At the very least, I can assure you potential investors will want to see a certain level of commitment from those they are entrusting their money to.
Teamwork: Otherwise referred to as chemistry, teamwork is essentially the barometer by which most outside investors will make their decision. A team that can work together without getting in its way is a force to be reckoned with, and venture capitalists are more than aware of its power. Prove to investors that you can work well with others, and they will most likely want to work with you.
“Coachability”: In my opinion, if you are not coachable, you are ignorant. For what it is worth, the smartest men are the ones who know they do not know everything. Humility can go a long way in gaining the trust of others. If you are willing to not only learn, but also admit when you are wrong, you will open a whole new world of working in tandem with others.
Knowledge: Perhaps more so than any other characteristics on this list, knowledge is power; it is your most important asset. Knowledge will see to it that everything is in working order. If for nothing else, a sound real estate education is the single most important trait a team can boast.
Again, one of the best ways to raise capital for real estate ventures is to convince money lenders that you are worth their time. For what it is worth, nothing will convince lenders to give you money faster than the opportunities you present to them. More specifically, the deal you are looking to fund should elicit some excitement. Remember, you are the one raising capital for real estate investments. It is up to you to make sure they want to lend you money. The house you intend to invest in should do most of the work. That said, run the numbers yourself and provide lenders with a reason to believe their money is not better off being spent elsewhere.
At this point, you will want to be upfront and divulge your intentions. Tell them how much you are looking for, and what an investment in your business could potentially return. Leave no stone unturned, as smart money lenders will want to mitigate their risk as much as possible. If they are asking questions you do not know the answer to, you have a lot more work to do. It is up to you to account for everything on a deal. If you can prove to them that you have dotted all your I’s and crossed all your t’s, the right opportunity will sell itself.
Investing in real estate successfully will require you to mitigate risk, and private money lenders are no exception. They are not in the business of throwing money away. They will want to make sure the opportunity you present them is a sure thing.
Understanding how to raise capital is an integral step to achieving financial freedom through real estate investing. Many investors focus so hard on highlighting properties, that they forget to present their strengths. While the property in question is technically what venture capitalists are lending money for, it is only a fraction of the total equation. Learning how to raise capital for real estate comes down to learning how to present yourself and your investing business. The key to financing a deal is demonstrating how you will take care of their money and return it with interest.
Is a lack of funds keeping you from investing in Real Estate? Do not let it!