Key Takeaways
- If you have ever wondered how to raise capital for a business, know that there are several unique financing methods you may be able to make use of.
- There are numerous ways to raise capital, but it’s about finding the right one for your situation that matters most.
- For those asking how to finance an investment property with no money down, there are several options worth exploring.
As a real estate investor, securing financing is a crucial aspect of the job. That’s why, when it comes time to raise capital, it is important to understand the various options at your disposal. Investors are often quick to think of private money and conventional mortgages, but sometimes unconventional financing methods can best fit your timeline and situation. Read on to learn about different strategies for raising capital and when to make use of them.
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How To Finance An Investment Property: 5 Unconventional Options
As an investor, you are probably familiar with more traditional methods of financing, like hard money or FHA loans; however, it is important to note that there are numerous funding options outside of the realm of traditional finance. If you’re ready to exercise some new resources, unique financing options may be the best way to secure your next deal. The following are just a few opportunities available to raise capital:
- Regulation A
- Self-Directed IRA
- Partnerships
- Wholesaling
- Private Placement Memorandum
Regulation A
If you’re asking yourself, “what is Regulation A,” you are not alone. For newer investors, you may not have come in contact with the process until now. However, this security offering is worth noting as you consider alternate ways to raise capital.
Reg A simply refers to an exemption from registration requirements while raising capital. What that means is that investors who are in the process of raising capital are able to advertise to accredited and unaccredited investors for up to $5 million in a given year. In other words, those making use of Regulation A can advertise an investment opportunity through most routes they deem appropriate, accredited or not.
What makes this method so useful is that there are no qualifications required from the investors you are attempting to raise capital from. There are some stipulations to consider, however. For example, Regulation A comes with the drawbacks of funding legal costs and waiting for an SEC review. Despite these roadblocks, many investors have found Regulation A to be a successful opportunity when raising capital.
Self-Directed IRA
A self-directed IRA refers to an individual retirement account where an investor is in charge of making the investment decisions for themselves. As you may already know, when it comes to a traditional IRA, individuals contribute funds to an account for retirement. Typically, a financial institution is responsible for investing those funds into the stock market or mutual funds.
The biggest advantage of a self-directed IRA when it comes to raising capital is that it offers more flexibility to diversify your investment portfolio, meaning you can invest those funds elsewhere. For example, self-directed IRAs may be used to purchase foreclosed properties or real estate notes. A common misconception among investors is that if you pull money from your IRA you will be penalized, when it comes to real estate, however, that isn’t the case. Investors are able to use funds from a self-directed IRA without being penalized for doing so.
While there are some restrictions when it comes to investing using a self-directed IRA, they do offer a unique opportunity for investors looking to raise capital. Investors should make note that self-directed IRAs are not advertised with traditional IRAs and you will often need to seek out a specified firm. That being said, this option can offer unique benefits.
Partnerships
It may sound obvious, but a business partnership allows two investors to combine their strengths and work together to form deals. When it comes to raising capital through real estate partnership, investors can seek to align themselves with capital investors ready to finance a given deal. Remember, investors will want to see something in you too, however. So if you are interested in a business partnership be sure to analyze the strengths you bring to the table.
Perhaps one of the greatest benefits of a partnership is that it allows investors to spread out the weight of the responsibilities of a given business or deal. For those in the process of raising capital, a business partnership can offer the unique opportunity of financing an investment.
Despite the simplicity of the definition, partnerships can come with their own set of complications. Most notably, be sure to put together a contract outlining the legal parameters of a partnership. This will help ensure that you are both on the same page, and are able to work together towards successful deals.
Wholesaling
You may be familiar with wholesaling as a popular exit strategy among real estate investors; however, this strategy can also be used to raise capital for future investments. Wholesaling involves an investor assigning a contract from a seller to an end buyer. Wholesalers will often profit from a given deal without ever purchasing a property.
Wholesaling is an appealing way to raise capital as an investor because it can allow you to do so in a short amount of time. Because of this, wholesaling is often thought of as a way to best finance an investment property. That being said, there are a few cons to relying on this method.
Investors may find difficulty maintaining a solid buyers list, which can make the process unreliable when it comes to raising capital. Those who are prepared to stay on top of a buyers list however, may realize success raising capital through wholesaling.
Additionally, this method of financing can provide newer or less experienced investors the opportunity to further their real estate education through a hands-on approach. If you feel ready to take on the challenge of identifying motivated sellers and and active list of buyers, this could be the opportunity you have been searching for to raise capital.
Private Placement Memorandum
A private placement is a method of unconventional financing that may be useful for investors wondering how to finance an investment property. Private placement is a great way to use other people’s money to accomplish your investment goals, and can be thought of similarly to crowdfunding. Private placement utilizes capital from private entities, such as private investors, which can be put towards an LLC and used for subsequent deals. One of the most appealing attributes of this method of financing is that when done correctly, it can offer a high amount of transparency.
A private placement memorandum itself refers to the legal documents outlining the deal at hand. It should include the objectives and terms of a given attempt to raise capital. It will also disclose any information the involved investors may want to discuss before moving forward with the agreement. Within the private placement memorandum lies one of the drawbacks of moving forward with this form of financing: the regulations. Take special care to understand the outlining process of a private placement memorandum and you might just find success with this method of raising capital.
Mistakes To Avoid When Raising Capital For Real Estate
When it comes to financing a real estate deal, especially when using unconventional methods of financing, there are particular mistakes you will want to watch out for. As always, mind your due diligence and make sure you move forward with the right financing option for you. Here are just a few mistakes to avoid:
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Failing to grow your network: One of the best things you can do as a real estate investor, no matter what financing route you decide to take, is to find an educated mentor and build yourself a network of like minded investors. In the case of several financing methods you will find yourself out of options in the absence of a strong professional network and mentor.
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Hiring the wrong accountant: As an investor you should always take careful consideration when moving forward with an accountant, particularly as you try and raise capital. The wrong accountant could equal missed opportunities, oversights or even a poor working relationship that harms your business in the long run.
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Forgetting to do your homework: If one of the above options sounds like how to best finance an investment property, it may be worth moving forward. However, do not forget to do the proper homework before committing to a deal. One of the biggest mistakes investors can make is moving forward with a deal simply because it sounds good. Do your homework, and make sure the method you choose for raising capital makes the most sense for your situation.
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Rushing the process you choose: Now, while these unconventional methods for financing may be different than what you’re used to as an investor that does not mean you should jump straight in. There is a fine line between rushing a process and spending time over-analyzing. Avoid this mistake by doing your research and following your instincts as you raise capital. Rushing things only creates room for problems down the road.
Summary
There are several options for those wondering how to finance an investment property, and that’s why it is key to learn about the opportunities available to you. When it comes to financing a deal, creativity can be the boost you need in order to realize success. As you <i>raise capital</i>, be sure to analyze each and every deal and make sure that you are making use of all options available to you as a real estate investor.
Have you utilized any of these methods of financing? Share your experience in the comments below for your fellow investors.
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