You know that raising capital is a crucial aspect of every business, and real estate investing is no different. Any real estate business needs finances and investment to secure you the best deals. And it is worth noting that you need to have a comprehensive understanding of real estate financing in order to raise capital. Raising capital for your real estate investment can be a challenge. However, it is a necessity if you are looking to succeed.
Note that as investing in real estate carries many risks, such as market risk, you have to carefully plan your real estate finances to get your business funded and be successful. You should know that the key to learning how you can raise capital for your real estate investments is to focus on determining what today’s lenders, such as banks and private money lenders, covet the most. And then you have to give it to them.
Sources of Real Estate Capital
If you are considering purchasing an investment property, such as a commercial property, but lack the funds, then do not worry. Fortunately, there are more real estate financing options than you may realize, and that is great. And keep in mind that selecting the most suitable option for your real estate investing strategy and specific situation can even save you thousands of dollars.
Federal Housing Authority (FHA) Loans
FHA loans are a great way to raise real estate capital. They are government-sponsored loans that incentivize individuals to purchase a property. These loans offer you a borrowing option in which you have to put down just 3.5%, and this is very convenient. However, remember that the FHA does not lend the money; instead, it guarantees the loan for your lender.
The FHA bears some of the financial risk by insuring the repayment of the property loan if you default. This is why usually, it is much easier for borrowers to be eligible for an FHA loan compared to a conventional loan. And here is another benefit. The lender is able to provide you with a competitive interest rate.
Private Money Lenders
Private money lending is just what it sounds like: it is real estate financing sourced from individual investors rather than institutional investors. Keep in mind that seeking real estate financing from friends, family, co-workers or individuals you meet at any local real estate investing meetup are all sources of private money.
Note that private money lenders are people that have access to funds or capital, which they would like to invest in a project. As private money lenders have no affiliation with any financial institution or bank, they will deal with you directly. As private lenders do not have as much ‘red tape’ as conventional lenders, the real estate financing process is much quicker and stress-free.
Usually, real estate capital that you raise from private money lenders is a bit more expensive than conventional mortgages, but terms of these loans are considerably more flexible. And this makes them appealing to borrowers.
Real Estate Crowdfunding
Crowdfunding is a relatively new method of raising real estate capital through the collective initiatives or efforts of your family, friends, and other individual investors. Real estate crowdfunding is great as it taps into a larger and diverse pool of individuals in an online platform known as a crowdfunding platform. This approach leverages these networks for greater exposure and outreach.
This is another great source of funds. Hard money lending is quite similar to private money lending; however, rather than coming from an individual, this real estate funding tends to comes from hard-money lenders.
Hard money lenders use your hard asset (your property) in order to secure the real estate loan. And it is worth noting that a majority of hard money lenders ask for 12% to 15% in interest and a one-time, upfront fee for processing the loan.
Banks and other financial institutions can take months to release real estate funds. Conversely, most hard money lenders provide you with almost instant access to real estate capital. Usually, hard money loans are often short-term in nature, and they are typically used by people who purchase to fix up and flip. Typically, you will get a hard money loan to cover about 70 percent to 80 percent of the price of the property before rehab.
Retirement accounts are an incredibly reliable source of real estate funding for many real estate ventures. Did you know that many investors are not aware that they can use their 401(k)s and even IRAs (Individual retirement accounts ) to invest in real estate?
And the great thing is that the IRS (Internal Revenue Service) allows eligible account holders to self-direct their retirement savings into real estate investments without charging any early withdrawal penalty. However, remember that any profits you make have to be returned to the account from which they originated.
Tips for Raising Real Estate Capital
Whether you want to raise real estate financing from private money lenders, hard money lenders, friends, family, or real investment partners, there are some things that are important considerations in your real estate financing strategy.
Know Your Target Audience and Your Pitch
Your sales pitch is going to differ depending on whom you are talking to. For example, getting real estate capital from your uncle or aunt will be a much different conversation compared to presenting a formal pitch to professional hard money or private money lenders.
Perhaps more importantly, become an expert and pay attention to the details. Uncle Ben may not need them, but most professional lenders will. It is important to master both an elevator pitch as well as a full presentation, including key documents: spreadsheets, charts, and numbers. Do not make the mistake of skimping on details.
Consider Your Investor’s or Partner’s Needs
Every investor who needs to raise capital for their real estate investing needs has to think outside of themselves. This means considering what your lenders want from their contribution. Note that even family and friends who are helping you out, do eventually want to be paid back.
There are several ways to access financing to meet your real estate investing needs. Discuss your options and strategy with an experienced loan officer and then come up with the most suitable financing arrangement for your specific circumstances, understanding that your circumstances will likely change over time.