For novice investors, raising capital for real estate investment may be challenging. Yet, with experience and exposure, it will get more superficial.
After being more acquainted with the various forms of real estate financing and different ways to raise capital, the investor may choose which is ideal for their project.
Knowing your worth and the value of the assets you will bring to the transaction is the valid key to obtaining money for real estate investing. If you’re starting your real estate investment portfolio, then you’ve come to the right place.
Keep on reading for our full breakdown of raising capital for real estate one step at a time.
Understanding Real Estate Capital
Let’s start with the basics. The money utilized to finance a specific investment transaction is referred to as investment capital. This may include the price of purchasing a home and making early renovations, as well as other up-front expenses.
Debt and equity are the two most common forms of investing capital. Debt is a term used to describe investment capital obtained from hard money lenders such as banks, which often demand interest payments.
Basically, hard money lenders will have no voice in the business benefits. They can only benefit from utilizing debt investment capital.
On the other hand, many investors may find it challenging to get cash from hard money lenders. This is when equity comes into play (and OPM comes in).
The money obtained by selling the ownership of a property or company is referred to as equity. Private money lenders may invest in a business if they believe it will be lucrative.
The advantages and disadvantages of using stock as a source of investment capital vary from using debt. Therefore investors must weigh both alternatives.
How to Raise Capital 101
Raising private capital may allow entrepreneurs who are willing to put in the effort to explore a variety of investment possibilities and diversify their portfolios.
Let’s take them one opportunity at a time.
Getting an Investment Property Loan or a Mortgage
There are a variety of mortgage loans available to help you finance your next real estate investment. You might want to use a traditional loan or an FHA. It’ll all depend on the property you’re purchasing or a 203k loan if you’re renovating the house.
Many lenders additionally offer lending packages, specifically ones that are tailored to investors. Yet, they usually demand a larger financial reserve, a down payment, and a better credit score.
And, if you’ve got your eyes on rental properties, then you’ll want to check out this article.
Talking to a Private Money Lender
To fund your project, you don’t need to go via a bank or a well-known lender. It’s also possible to borrow money from friends, family members, coworkers, or a cash-rich acquaintance or business professional. You’ll have to pay interest or guarantee a return on the private lender’s investment in most instances.
The bright side? There is no red tape or onerous qualification procedure, and you should be able to receive your money quickly. Just be sure it isn’t a long-term answer. In most cases, a private lender wants their money returned within a few years.
Seeing What a Hard Money Lender Offers
Another private financing alternative is hard money lenders, with less rigorous qualification requirements than traditional mortgage loans and financing products. But what’s the catch? They also have considerably higher interest rates attached to them.
As a result, a hard money loan is best suited to quick projects such as fix-and-flips or a bridge loan between purchasing a property and obtaining a longer-term loan.
Tapping Into Crowdfunding
You’ve most likely contributed to a GoFundMe or Kickstarter campaign.
Real estate crowdfunding, on the other hand, is a similar strategy. You propose your idea on a crowdfunding site, and interested investors may donate as much as they like to your cause. In return, they get a share of the project’s earnings and ownership of a piece of the project.
Exploring Home Equity Options
This is only a viable option if you already own one or more properties. If that’s the case, you may utilize a home equity loan or a home equity line of credit (HELOC) to access the equity in your current property and use the money to finance your next real estate investment or renovation expenses.
A cash-out refinancing operates in the same way. Refinance a current property’s mortgage, get a higher-balance loan, and use the difference toward your new project.
Check Out P2P Lending
Another comparative approach is P2P lending (peer-to-peer lending), which works more like a loan than crowdfunded transactions. You submit your idea to a peer-to-peer financing platform and get connected with a potential investor. That investor then loans you the money you need, which you will repay over time — plus interest.
P2P loan terms differ considerably, so make sure you read the small print before taking this option. You should also check the platform’s data security and other investor assessments. Not all fundraising methods are made equal, much like conventional mortgage lenders and banks.
Have a portion of the capital you need but not the whole sum? Make an effort to locate a mate. You both contribute a part of the money and jointly invest in the project. It addresses the capital problem while also providing you with someone to work with.
Just be highly cautious while screening the individual. They must be dedicated to the project and have the necessary resources to complete it.
Their skills and knowledge should, ideally, complement yours. You may also wish to hire an attorney to assist you in structuring your transaction. This will guarantee that you and your partner are on the same page about how you will manage future earnings and losses.
Ready to Raise Capital for Your New Investments?
For those entering the realm of real estate investment for the first time, trying to figure out how to raise capital can be somewhat overwhelming.
But, we hope that our guide has shed some light on all you need to know about raising capital for your shiny real estate portfolio. And, if you liked our article, then you’ll love checking out our additional tips and strategies. All of those will be available to you in our finance and real estate sections.