Have you ever wondered how raising capital for real estate deals actually works?
Investing in real estate has become synonymous with the American dream, and for good reason; just about anyone can do it. What’s more, there isn’t an investment vehicle more capable of helping individuals achieve financial freedom than real estate. The housing sector is firing on all cylinders at the moment, and there is no reason people can’t get in on the action. The barrier to entry is so low that all you need is the right amount of passion, a little due diligence and a sound real estate education.
It is important to note, however, that something of great importance is missing from that list: capital. While capital is absolutely necessary to invest in real estate, there is no rule to suggest the money must come out of your own pocket. In fact, you don’t have to invest any of your own money at all; it is entirely possible to invest in real estate solely through the use of other people’s money, or what I like to call OPM.
Having said that, if the money isn’t yours to begin with, you must devise a strategy to attract others that may be interested in funding your real estate ventures. In doing so, you need to be willing to sell respective investors on yourself as much as the impending deal you may or may not have lined up.
In reality, venture capitalists are ready and willing to lend their money out to those that can give them a solid return. Your mission, should you choose to accept it, is to convince them that you are worth investing in. Outside of the deal in question, potential investors will gauge the viability of an investment opportunity on one thing, and one thing only: the individual asking them for money; you! You must convince venture capitalists, beyond the shadow of a doubt, that you are worth their time and money. If you want to learn how to raise capital for real estate, first take it upon yourself to learn what venture capitalists look for in the right investor.
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.
[ Need money to invest in real estate? Attend a FREE real estate class in your area to learn how to fund real estate deals with little to no money of your own. ]
How To Raise Money For Real Estate Investing 4 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’s 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. It is worth noting, however, that learning how to raise capital for real estate is not as hard as many new investors make it out to be. There are plenty of lenders who are simply waiting to give their money to a worthy borrower; investors just need to know where to look.
While there are plenty of ways to secure working capital, there are four sources investors have come to rely on more than any others:
Private & Hard Money Lenders
Private Placement Memorandums
Private & Hard Money Lenders
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 aren’t associated with institutionalized banks, and therefore aren’t subject to nearly as much “red tape.” Instead, these lenders tend to work for themselves, and are usually actively looking to lend out their own 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 don’t 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 lenders 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’s 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 is able to 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 won’t 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 similar to private offerings. More specifically, however, a private placement awards real estate entrepreneurs 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’s 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 a 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.
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 has the ability to instill confidence in those parting ways with a large sum of money than experience; the peace of mind it creates can’t be underestimated.
However, 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 is able to 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 an 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; don’t let your experience, or lack thereof, take centerstage on a given deal.
In reality, venture capitalists and money lenders are looking to work with those that they feel comfortable giving their money to. If you can’t 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 are well aware of the fact that 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 own 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 in 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 illicit 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 own 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’s worth, the smartest men are the ones who know they don’t 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 up a whole new world of working in tandem with others.
Knowledge: Perhaps more so than any other characteristic 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’s 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 illicit 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 isn’t 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 don’t 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 of 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.
Raising capital for real estate investing is an integral step for every real estate investor. However, few are aware that they are not selling lenders on respective deals, but rather themselves. While the property in question is a large reason people will lend money, it is only a fraction of the equation; lenders want to feel comfortable with those they are giving their money to. The most successful lenders, for that matter, have learned how to identify the best investors; those that will take the best care of their money and return it with interest. If you want to be the investor lenders line up for, be sure to exercise these traits on a daily basis.