Raising capital for real estate can be a challenge for many new investors, but it is necessary for anyone looking to succeed in the industry. The key to learning how to raise capital for real estate is to focus on identifying what today’s lenders covet the most (and give it to them). If you succeed, there’s no reason you shouldn’t be able to raise the real estate investment capital you need for your next deal.
Other People’s Money (OPM) is what makes real estate investing possible for a considerable percentage of aspiring investors. Even the most successful real estate professionals and legendary investors almost exclusively use OPM to reduce liability and maximize returns. Daniel Chan from Marketplace Fairness suggests “It is important for investors to know how to raise capital in the real estate world because it gives them more options and opportunities to invest in the market. Even if an investor has their own money, knowing how to raise capital can help them get better deals and make more money in the long run”. As you can see, raising capital is critical for investors of every level.
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However, both novice and seasoned real estate investors struggle to connect with potential private investors and close the deal. (Or even understanding how capital works with an alternative strategy such as tax lien investing.)
This is a shame, considering there is more real estate investment capital out there than ever before. Remember, private money lenders want to work with you just as much as you want to work with them. Private lending has never been so attractive or widely accepted, and the benefits for you and your lender are endless.
Raising real estate investment capital is about more than a simple message or conducting a presentation that resonates. It has to be more than a pretty website, thousands of inorganic Facebook friends, glossy folders, and a nice suit.
What Is Investment Capital?
Investment capital is the money used to fund a given investment deal. This can include the costs of acquiring a property, initial renovations, and upfront costs. There are generally two types of investment capital: debt and equity. Debt refers to investment capital from hard money lenders, such as banks, and often requires interest payments. An advantage of using debt investment capital is that hard money lenders will not have a say in the company. However, many investors may find it difficult to secure capital with hard money lenders. This is where equity (and OPM come in).
Equity refers to money secured by selling ownership of a property or business. Private money lenders may invest in a company if they see the investment as potentially profitable. Using equity as a form of investment capital has different pros and cons to utilizing debts, so investors must consider both options. For entrepreneurs ready to put the work in, raising private money can offer the chance to pursue various investment opportunities and expand their portfolios.
Top Sources Of Private Money
Private money can be found all over the real estate industry, but it may not be easy to identify if you don’t know what to look for. Here are some of the top sources of private money to be aware of:
Business Partner: A common business arrangement is for one partner to manage the heavy lifting in terms of workload, while the other supplies the capital (called a silent partner)
Peer-to-Peer Lending: P2P lending is made possible through online lending platforms that partner you with other investors.
Crowdfunding: Real estate crowdfunding has become increasingly common over the last several years, and again allows you to utilize an online lending platform to finance investment deals.
Family, Friends, or Colleagues: Many private money deals are funded by sources close to the investor, such as a family member with extra capital.
Hard Money Lenders: It is also possible to finance a deal with an investor you haven’t worked with before. Ask around your network for trusted hard money lenders to learn more.
What Are Money Partners?
Money partners are anyone you decide to work with to fund a given deal. When it comes to raising capital for real estate, money partners can be beneficial because they can enable investors without significant capital to get started. Money partners can finance a deal, provide advice, and even share a given investment risk depending on the arrangement at hand. Because of this, money partners are often highly sought after in the investment world. However, it is important to note that partnering with other investors is mutually beneficial. Business partners stand to benefit from the success of a good deal just as much as you do, something that is important to keep in mind as you get ready to approach potential lenders.
Money partners exist throughout the real estate industry, though it is important to approach each potential investment carefully. It is not uncommon for even the most seasoned real estate investors to fail to close a deal with private money lenders or money partners. To ensure this does not happen to you, research potential investors you are trying to work with and put in the time and effort to ensure you are prepared every step of the way. If you are interested in learning more about how to find private money lenders or money partners, read this guide.
Uses For Private Money
Those who want to raise capital for real estate most commonly use private money for refinancing a property or buying a new property. For example, suppose you purchased a property using a conventional mortgage but want to want to negotiate for a shorter repayment plan or lower interest rate. In that case, you can use a private money lender to help you refinance.
If you are interested in condos, single-family homes, multifamily homes, or apartments, private money can be used to purchase your new investment property. To get a private money loan for a new investment property, you will have to pitch the potential profitability of the property with reliable numbers and predictions. Raising capital for real estate using private money is typically easier for experienced investors as they have records of successful deals they have made.
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How To Raise Capital For Real Estate
Private money lenders will often have their own set of rules and guidelines. While many will exercise similar practices, their borrowers’ criteria are different. I maintain, however, that there are several universal things private money lenders look for.
If borrowers can identify what it is their money partners want, it’s more likely that they will receive the loan. You see, lenders are in the business of making money, too. There are 6 P’s that you can remember when it comes to private money lenders. If you can give them the things I outline below, you could find yourself with the money needed to buy your next deal:
Protect their capital
Promise realistic returns
Prove your potential
Procure a great deal
Provide your track record
Promote relationship building
1. Protect Their Capital
The primary concern investors have is protecting what they’ve loaned out. If they lose that, they won’t be able to profit, which is the whole point. That’s why so many money partners have recently invested in low-yielding real estate-related products and ventures. When contemplating this factor, most look for collateral and how easy it will be to get their money back in the worst-case scenario. So be ready to answer these questions and have a plan B in your back pocket. It should go without saying, but the best way to work with a private money lender and raise the real estate investment capital you need for your next deal is to convince them that it’s worth their time.
2. Promise Realistic Returns
Where most real estate investors go wrong when trying to raise capital is promising huge returns. If you sound overconfident, your presentation will automatically appear to be a “high-risk investment” or “scam,” which is certainly not the message you want to send. You will have to be above average market rates – of course – but don’t project too high. The last thing you want to do is overpromise and under-deliver. Even if you think your goals are possible to achieve, start by underestimating and then deliver more later, which will create a sense of loyalty and reliability between you and your first line of money partners. If you tell them they will receive an ROI of 8 percent, and they actually make 14 percent after all is said and done, you can bet they’ll put you at the front of the line in their contact database and beg you to take their money for your next deal.
3. Prove Your Potential
On the other hand, you need to make your investment sound appealing. Savvy investors with bigger pockets and heavy-weight venture capital firms are, of course, intrigued by the promise of big wins. So while keeping projections conservative, don’t be afraid to hint at the full upside potential – those big numbers you are hoping you’ll really hit.
4. Procure A Great Deal
Everyone wants a “deal.” There are two reasons for this. The first is that it is simply human nature. If someone thinks they are getting a good deal on a product, it automatically gives the impression of value. The second is that these individuals and money managers want to look smart and feel like they are making a sound investment. They all have someone they need to impress. It could be their boss, co-worker, spouse, competitor, or even themselves. Regardless of who, your potential money partner will want to be able to boast about how intelligent they were to discover this high-yielding or trendy investment before everyone else. Help them out.
5. Provide Your Track Record
Of course, most investors expect to see a proven track record. They want to know that you can deliver on your plans. If you don’t have direct experience in real estate investing, what other relevant experience do you have or who else can you partner with? Have your portfolio ready to go with your successes on top. You’ve got to have the numbers to prove yourself.
6. Promote Relationship Building
Surprisingly – or perhaps not so surprising – having a personal relationship between both investing parties trumps the rest of the qualifications. So how can you build more authentic relationships or find like-minded individuals – whom you might already know – that might want to work with you? This is one of the most important habits to acquire as a real estate investor. Try attending a local networking event to get your face out there. Building and maintaining relationships is necessary if you want to discover a potential money partner and achieve success.
5 Tips For Raising Private Real Estate Capital
The best advice for raising private capital in real estate will vary depending on who you ask. This is because over time, investors find the way of doing things that work best for their real estate businesses. However, this is not helpful to newbies. What I can say is that it takes time to develop a surefire system for raising private capital. In the meantime,—here are some tips to help you get started:
Use Your Own Money First: Before you start fundraising a new project, assess how much capital of your own you can rely on. Not only will this help you frame the budget for the project, but it will also lower the amount of cash you are paying interest on should you find a private lender. To increase your personal capital, consider redoing your monthly budget and reducing expenses for a while; you may even be eligible for a home equity loan.
Attention To Detail: The details included in your portfolio are going to make or break your pitch to private money lenders. Ensure you have an accurate purchase price, property value, rehab cost, and rental value wherever it applies to you. If this is your first investment deal, make sure the figures and estimates in your deal analyzer are as accurate as possible. Strong attention to detail could mean the difference between choosing a potential investment and securing enough financing.
Showcase Your Success: When you complete a successful real estate deal, don’t be modest! Share the good news with your network, website, and social media following. Investors can and should showcase their successes (or wins) as they come along. This can help establish your credibility over time in the real estate industry when done right.
Build Relationships: Networking is not as simple as exchanging business cards, and you shouldn’t want it to be. If you want to have a successful career in real estate, building relationships across the industry is critical. Keep up with your connections, celebrate their successes, and check-in from time to time. Building genuine relationships will help your career more than you can imagine.
Educate Others: Sometimes, you may encounter potential lenders who are mostly unaware of the intricacies of a real estate deal or the dynamics of private lending. That’s okay; it could be the perfect opportunity to educate someone else about what you do. As you build relationships with other real estate professionals, have conversations about lending and acquiring deals, share the resources you find helpful, and put people in contact with one another when fitting. This will help you build relationships (as I mentioned above) and potentially introduce investors to a mutually beneficial real estate aspect.
Raising Capital For Residential Vs. Commercial
When comparing residential and commercial deals, financing is going to look very different. Residential properties almost always cost less than commercial properties, and investors need to secure less funding overall. It can take a shorter amount of time to raise the capital necessary for a residential deal. Commercial deals, on the other hand, require much more capital but come with higher profit margins. For this reason, some investors may find it easier to secure commercial properties. Overall, it comes down to your network and preferred lenders. Raising capital for residential vs commercial properties requires an understanding of the different income projections.
Continue Learning How To Raise Capital For Real Estate
Raising capital for real estate has become one of the most discussed topics associated with real estate investing. If for nothing else, it’s the one concept anyone could stand to improve on, there’s never too much funding. As a result, there are volumes written on the subject of raising capital for real estate, and perhaps even more knowledgeable people talking about their own strategies just about anywhere someone is willing to listen. Truth be told, it’s not hard to find someone willing to offer their own opinion on raising capital for real estate investments; the hard part comes in distinguishing between those who are truly knowledgable and those who are, for lack of a better word, ignorant.
It should go without saying, but incorrect information can be damaging to one’s career. Therefore, it’s important to gather information from trusted sources, not the least of which include:
Books: To this day, books represent one of the greatest ways to filter through the volumes of information made available to investors. However, the number of books one can find on raising capital for real estate can be staggering. Instead of sifting through everything, and risking learning from someone that may not know what they are talking about, save yourself some time and consult “The Real Estate Wholesaling Bible,” by my friend and business partner Than Merrill. As the name suggests, aspiring investors will learn how to wholesale real estate, but a large portion of the book deals with raising capital and funding. As a compliment, my own book, “The Real Estate Rehab Investing Bible,” will teach readers the importance of raising capital for real estate and the best ways of going about doing so.
Podcasts: Relatively new to their written counterparts, podcasts are not to be underestimated. Oftentimes free, these downloadable audio files are filled with information from today’s top minds in the real estate industry. Get Wealthfit, for example, is a compilation of podcasts by investors who have been exactly where many aspiring investors hope to be one day. Get Wealthfit covers everything from money management to marketing strategies and everything in between.
Blogs: Not unlike books, blogs offer knowledgeable individuals the ability to share their knowledge with the masses. Only, instead of releasing once every year or so, writers can publish blog content daily. Than Merrill’s blog, for example, publishes real estate content on a weekly bases. Once there, you will find plenty of content on raising capital for real estate and just about everything else you may be interested in that has to do with the housing sector.
Raising capital for real estate doesn’t need to be nearly as hard as many make it out to be. For those learning how to raise capital for real estate, remember, working with money partners is as simple as doing two things: learning what it is they want the most and giving it to them. The investors can identify what today’s lenders are looking for that stand the best chance at getting the money they need for their next deal. That said, pay special considerations to the steps above, as they offer insight into what the majority of today’s lenders look for in a borrower. Only when you can give a lender what they want will your chances of receiving real estate investment capital increase dramatically.
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