Techniques & Strategies For Raising Real Estate Capital
Owning real estate has become synonymous with the American
dream, and for good reason; almost anyone can do it. What is more: real estate
is one of the best investment opportunities for individuals wishing to achieve
financial freedom. The housing sector has continued to perform at a high level,
and there are no reason people cannot get it on the action. All you need to get
started is the right amount of passion, due diligence, and a sound real estate
education. The last element missing from that list is capital. Have you ever
wondered how to raise capital for real estate?
While capital is necessary to invest in real estate, there
is no rule to suggest the money must come out of your pocket. You do not have
to invest any of your own money at all. It is entirely possible to invest in
real estate solely using other people’s money, or what I like to call OPM.
Having said that, if the money is not yours, to begin with,
you must devise a strategy to attract investors who may be interested in
funding your real estate ventures. To do so, you must learn to sell respective
investors on yourself as much as the prospective property you are trying to
take on.
The reality is venture capitalists are ready and willing to
lend their money to those who can give them a solid return. Your mission,
should you choose to pursue real estate investing, is to convince these
investors that you can provide a solid return. Often, venture capitalists will
gauge the viability of investment on one thing, and one thing only: you. As the
person asking them for money, you must be ready to convince them beyond a
shadow of a doubt that you are worth their time and money. Keep reading to
learn more about how you can raise capital for real estate.
What Are Real Estate Ventures?
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.
Investing in real estate ventures is one of the most
profitable businesses among global investors. Real estate ventures can provide
you several benefits including:
ü
Equity for the future
ü
High return on investment
ü
Cash flow for retirement
ü
Strategy for college funds
ü
Hedge against inflation
ü
Depreciation tax breaks
ü
Property appreciation
ü
How To Raise Money For Real Estate Investing 6
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 is 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. Note that learning how to raise capital for real estate is not
as hard as it may seem — you just need to know where to look.
While there are plenty of ways to secure working capital,
there are six sources investors have come to rely on more than any others:
ü Private & Hard Money Lenders
ü Self-Directed
Accounts
ü Private
Placement Memorandums
ü Wholesaling
ü FHA
Investment Loan
ü Peer-to-Peer
Loan
ü 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 are not associated with institutionalized banks, and
therefore are not subject to nearly as much “red tape.” Instead, these lenders
tend to work for themselves and are usually actively looking to lend out their
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 do not 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 lender has made raising
capital for real estate deals much easier than in years past.
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. For what it is 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 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 will not 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 like private offerings. More specifically, however, a
private placement awards real estate entrepreneur the ability to raise capital
by selling securities to other investors.
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 is 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
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.
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. Essentially 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.
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. Peer-to-peer lending typically takes place in an online
marketplace setting. With 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).
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 including Fundrise, Realty Mogul,
Groundfloor, and Fund That Flip.
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
Seasoned Experience
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 can instill confidence
in those parting ways with a large sum of money than experience; the peace of
mind it creates cannot 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 can 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 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; do not let your experience, or lack
thereof, take centerstage on a given deal.
Venture capitalists and money lenders are looking to work with
those that they feel comfortable giving their money to. If you cannot 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.
Team Composition
The best investors know 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 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 by 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 elicit 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 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 is worth, the smartest men are the
ones who know they do not 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 a whole new world of working in tandem
with others.
Knowledge: Perhaps more so than any other
characteristics 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.
Opportunity
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
is 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 elicit 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 is not 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 do not 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 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.
Summary
Understanding how to raise capital is an integral step to
achieving financial freedom through real estate investing. Many investors focus
so hard on highlighting properties, that they forget to present their
strengths. While the property in question is technically what venture
capitalists are lending money for, it is only a fraction of the total equation.
Learning how to raise capital for real estate comes down to learning
how to present yourself and your investing business. The key to financing a
deal is demonstrating how you will take care of their money and return it with interest.
Is a lack of funds keeping you
from investing in Real Estate?
Do not let it!
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years. © 2020 Level 4 Funding LLC. All Rights Reserved.
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