How To Raise Capital For Real Estate Investing:
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 receive appropriate funding and gain access to it at a moment’s notice. Note that learning how to raise capital for real estate is not as hard as it may seem — you need to know where to look.
While there are plenty of ways to secure working capital, there are eight sources investors have come to rely on more than any others:
- Private & Hard Money Lenders
- Self-Directed Accounts
- Private Placement Memorandums
- Wholesaling
- FHA Investment Loan
- Peer-to-Peer Loan
- Crowdfunding
- Home Equity
1. Private & Hard Money Lenders
Hard money lenders are organized semi-institutionalized lenders who are typically licensed to lend money to those in need. On the other hand, private money lenders 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 funding source for today’s real estate investors. If for nothing else, these alternative funding sources 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 their funds to those in need. These lenders can award investors with short-term, high-rate loans based primarily on the subject property, thanks to their alternative nature. 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.
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) in return for granting access to their capital. 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. On the other hand, banks 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.
2. Self-Directed Accounts
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. The Internal Revenue Service (IRS) allows qualifying account holders to self-direct their savings into real estate investments without any early withdrawal penalty. Of course, the account must be held by a custodian that allows account holders to self-direct their assets.
If their account can 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 spend the money immediately, but the resulting tax shelter can increase their profits.
3. 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.
4. Wholesaling
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. Still, with 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 funding source, wholesaling will certainly help investors interested in raising capital for real estate deals.
5. FHA Investment Loan
FHA loans are backed by the Federal Housing Administration and were created to help low to middle-income Americans purchase houses. Given their original purpose, you may be wondering: can FHA loans be used to invest in real estate? The answer is yes. FHA loans can be used to invest so long as the property serves as the applicant’s primary address. This means using an FHA loan to buy a multifamily property and living in one unit while renting the others. These loans can provide a unique opportunity for buyers willing to live on-site to begin generating rental income. As far as specifics go, FHA loans do require a credit score of at least 580, as well as a down payment of around 3.5 percent.
6. Peer-to-Peer Loan
A peer-to-peer loan is exactly what it sounds like: one investor loaning funds to another. This setup has become increasingly popular in recent years as more and more investors try to reap the benefits of real estate investing. According to Carter Seuthe, CEO of Credit Summit, “P2Ps allow you to shop around on online marketplaces for the best kind of loan for your needs.” Not unlike most forms of real estate capital, the loan amounts, interest rates, and requirements will vary from lender to lender (and, in this case, platform to platform as well).
7. Crowdfunding
A crowdfunding strategy involves multiple investors contributing to your project’s total funds. Instead of relying on one or multiple financing sources for your project, crowdfunding allows multiple investors to contribute any amount of money until the total amount is reached. In return, these investors will own a portion of your projects. They will also receive a portion of the profits that your investment generates.
There are a few things to keep in mind as you learn more about the various platforms available. Always research data security, origination fees, and payback periods when considering your options. Research the details carefully to find the right platform and investor for your deal. Some examples to help you get started include Fundrise, Realty Mogul, Groundfloor, and Fund That Flip.
8. Home Equity
If you own a property, you can use the equity you own in the property through a HELOC. A HELOC, or home equity line of credit, allows you to access the property’s equity and use that money to finance another investment or make repairs or renovations to the property.
