Whether you’re a developer, property manager, or house “flipper,” you’ll most likely require capital to fund your real estate venture. All businesses require some upfront capital, but real estate is particularly capital-heavy. Without capital, you won’t be able to buy or fix up properties. Let’s take a look at how to raise private capital to buy your first apartment property.
This may particularly look tedious for new investors, but all you need to do is understand how you can raise capital and the terms and conditions attached to each capital raising
If you’re thinking about raising private capital for your real estate investing business, there are a few things you need to know. First, you need to have a solid business plan. Second, you need to find the right private lenders. And third, you need to structure your deals in such a way that will maximize your profits.
How to Raise Private Capital for Real Estate?
- Personal Cash
One way to fund your real estate venture is to use personal cash. Some entrepreneurs may turn their head at the thought of using their own savings for a business, but this is actually one of the most common forms of small business funding.
The problem with using personal cash, however, is that you may or may not get it back. If your real estate venture is a success, you can pay yourself back. If it goes under, though, you may have to write it off as a loss.
- Traditional Bank Loan
Bank mortgages are one of the most popular methods used to raise capital for real estate ventures. Banks usually assess applicants’ debt-to-income ratios, credit histories, and assets by looking at documents such as:
- Recent payslips
- Bank statements
- W-2 forms and tax returns
- Credit history
Your chances of getting approved for a mortgage or investment property loan will be high if you have a great credit score, minimal debt, and a stable income.
- Business Loan
Of course, you can also seek a traditional business loan to fund your real estate venture. According to a report by the U.S. Small Business Administration (SBA), business loans account for more than half of all small business financing.
Banks and other financial institutions may loan you money if they view your business as having a low risk of defaulting. To determine this, they’ll look at various factors like your business’s credit history, your personal credit history, business revenue, projected revenue, how long you’ve been in business, and more.
- Hard Money Loan
Perhaps the most beneficial funding option for real estate ventures is a hard money loan. Hard money loans are a type of asset-based financing in which a private investor or group of investors offers a real estate business a short-term loan. Being that it’s asset-based, however, hard money loans require collateral to secure, the most common of which is real estate.
If you want a hard money loan, you’ll need real estate property to secure it. As a benefit, this also means that hard money loans are easier to obtain. Since they are backed by collateral (real estate), investors are more willing to issue hard money loans to entrepreneurs with little-to-no credit or bad credit.
- Private Money Lenders
Private money lenders are individuals that have access to capital that they wish to invest. Such lenders are not affiliated with any financial institution or bank and therefore deal with borrowers directly. Since private lenders don’t have as much ‘red tape’ as traditional lenders, the financing process is much faster and stress-free.
Money raised from real estate partnerships with private money lenders can be used for:
Refinancing a property – Let’s say you bought an investment property using a conventional mortgage, but wish to negotiate a shorter repayment timeline or better interest rate. Private money lenders can help you refinance, thus significantly lowering the associated costs.
Buying a new property – Investors can also use private money to buy new investment properties; condos, multifamily homes, single-family homes, or apartments. The key to acquiring such loans is to craft the right pitch and run the numbers using a reliable real estate investment calculator. If you are a first-time investor, talk about the potential profitability. Experienced investors can show evidence of successful real estate deals in the past.
- Peer-to-Peer Loan
Crowdfunding is becoming increasingly popular as a strategy to raise money for real estate investing. How does Peer-to-Peer Loan work? A crowdfunding marketplace simply matches lenders (investors and individuals) via an online service. With the low overhead costs involved, P2P loans are more affordable than conventional mortgages. Though a good credit score is required, you can still get approved for a loan with a less-than-perfect score.
When evaluating P2P loan platforms, be sure to check the following aspects:
- Data security features
- Required upfront origination fees
- Privacy policies regarding personal data
- FHA Investment Loan
If you want an investment loan with lower requirements, you could opt for the Federal Housing Administration (FHA) loan. Since such loans are insured by the FHA, lenders offer friendly terms. For example, the down payment for investment property required for an FHA loan is only 3.5%, unlike other lenders that charge 20%. However, to qualify for this low offer, you must have a FICO score of not less than 580.
In addition to this, FHA loans are usually reserved for owner-occupied properties. In order to make it work for an investment property, you must use the loan to purchase a multifamily home, reside in one unit, and rent out the others. This will mean earning a rental income while living rent-free. Based on the time set by your mortgage lender (usually up to 1 year), you can then move out and rent out all the units. So if you are thinking of how to buy a multifamily property with no money, an FHA loan is the way to go.
- Wholesaling Real Estate
When it comes to how to raise capital for real estate, wholesaling is a commonly overlooked strategy. Though not traditionally considered a source of funding, wholesaling is a practice that has helped savvy real estate investors get funding quickly. When executed well, investors can make money within hours from a wholesale deal without spending their own money.
In this strategy, the real estate investor (wholesaler) contracts a property with a seller, looks for a potential buyer interested in buying it, and then assigns the contract to them. The idea is to sell the property to an interested buyer before the contract with the homeowner lapses. The wholesaler makes money by selling the property at a price higher than the initial amount quoted by the seller. Profits earned can then be used as capital for real estate deals.
Looking to raise private capital for your first apartment property can be incredibly scary. Raising capital for real estate deals is not as difficult as many people imagine. The most important thing when learning how to raise capital for real estate is to know what lenders want and give it to them. This will greatly enhance your chances of securing the financing that you require for investment property.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
Contact Estateserve today and realize your cash flow goals.
How much equity should I offer investors?
The amount of equity you offer will depend on the size of the investment and the potential return on investment. A typical range is 10-50% equity.
What should I do if I don't have a personal network to reach out to?
Consider using online investment platforms to reach a wider audience of potential investors.
What kind of returns can I expect to offer investors?
The returns you offer will depend on the size of the investment and the potential return on investment. A typical range is 8-20% returns.