How to Raise Capital for Real Estate

In 2007, over 2/3 of investors had their sights set on the stock market, however, in recent years, that number has dropped to 50%, with many investors moving to the real estate market as their main form of investing. The real estate market offers investors tangible assets that can provide amazing returns on their investments. However, buying a home, apartment complex, or even a commercial building takes large sums of capital upfront, creating a barrier to entry for some investors.

 

Luckily, raising capital to invest in real estate is a very common practice and there are many ways to do it. If you’re not sure where to start, we’ll break down the common methods for how to raise capital for real estate, as well as provide some tips and tricks for doing so successfully. In no time, you’ll be on your way to becoming an active real estate investor.

 

Tried and True Techniques

 

Funding is the key to getting any real estate investment project off the ground. While some people have overflowing bank accounts and can self-fund their investments, that’s not the case for many real estate investors. You can invest in the market without using even a cent from your own accounts, and there are many ways to do so. However, a few capital raising techniques have made their way to the forefront of the industry.

 

Private & Hard Money Lenders

 

Private lenders are most often individuals with access to capital and a desire to invest it. Hard money lenders usually operate as an institution that is licensed to lend money. Though a bit different, neither of these two sources of capital are associated with banks, meaning there is less red tape, and the money can be accessed much more quickly. 

 

Where banks and government lenders might take a number of months to get you the funds, private lenders and hard money lenders can do it in a number of days if they want to, which is much more agreeable with the fast nature of the real estate market. However, these lenders will offer interest rates of 12%-15%, sometimes higher, which is 3x more than many other options.

 

Wholesaling

 

If you’re okay with putting a bit of elbow grease into your investment, wholesaling may be the way to go. Essentially, this method requires you to act as an intermediary between someone selling a property and someone buying a property. Wholesaling requires properties that are being sold at an excellent rate, which often means they are fixer-uppers. After securing a contract with the seller, you renovate or “flip” the property and contract it to your buyer at a higher price to make a profit.

 

Self-Directed Accounts

 

If you have a self-directed IRA account, you can access funds in your retirement savings to invest in real estate. While traditional IRAs place restrictions on the assets that can be sold, a self-directed IRA allows you full discretion in making those decisions. Thus, you can invest the money in your account into real estate without facing an early withdrawal penalty. Any profits made will be returned to your account until retirement, making this a great way to fund the later years of your life.

 

FHA Investment Loan

 

Loans offered by the Federal Housing Administration (FHA) were created to help low-income and middle-income borrowers qualify for financing to purchase real estate. The requirements are a bit different than other loan types; down payments are often as low as 3.5% and buyers can qualify with a credit score as low as 580. The caveat with these funds is that FHA loans are intended for buyers who plan to occupy the property they purchase. However, if you purchase a multi-family home, you can occupy one unit and rent out the others.

 

Peer-to-Peer Loan

 

P2P loans are becoming more popular in the real estate market, giving investors the opportunity to raise money from other investors. P2P loans are done through online marketplaces that connect you with potential investors. Shopping around for the right lender is critical with these types of loans; since they are offered by individuals, interest rates and terms can vary widely.

 

Traditional Bank Loans

 

Last but not least, investors can go to banking institutions for loans. There is a lot of red tape, and the process can take a while, but in the right situation, these types of loans can work well. With lower interest rates than many other lenders offer, banks are a popular source of capital for investors. Your financial history and credit score will be thoroughly examined prior to approval, so make sure all your ducks are in a row before applying.

 

Appealing to Investors

 

No matter what source of capital you decide to go with, you’ll have to convince lenders to invest in you and the real estate you’re targeting. This can be difficult for some, but there are a few key ways to get your message out, connect with potential investors, and successfully secure capital:

 

Showcase Your Experience

 

It’s no secret that lenders would rather give money to someone who is very experienced than a beginner. The more experience you can get under your belt, the more likely you are to convince lenders to grant you the funds you’re looking for. When you’re first starting out, this will be more difficult, but if you start small, find success, and keep growing, you’ll get your footing in the industry.

 

Build a Strong Team

 

It’s rare that real estate investors are working alone, and lenders want to feel like they can trust everyone involved. By taking the time to build a strong team that can communicate with lenders, illustrate professionalism and expertise, and of course, display a collaborative environment, you’ll be much more likely to secure funding.

 

Present the Opportunity

 

You have the make the sale to get the sale. If your lenders don’t feel like the investment will have the return you’re targeting, they won’t invest. These lenders do this every day, and they can see through a faulty opportunity within seconds. Make sure that when you seek funding, your investment plan is airtight and mistake-free, then, show that to potential lenders.

 

Get Your Message Out

 

Use the power of podcasting and social media to connect with potential lenders and spread your message to larger audiences. Going on different podcasts is a phenomenal way to do this because they are often in a specific niche. So, if you are a guest on a real estate podcast, you’re going to reach people that are interested in real estate, allowing you to target your message a bit better.

 

Invest in What You Believe In

 

If you wouldn’t spend your own money on an investment, you cannot expect lenders to spend their money on it either. Take your time in finding the right investment opportunities, preparing your message, and connecting with a variety of lenders. After a while, you’ll have a solid network of contacts and colleagues that will make securing funding easier down the line. Now get out there and start investing!

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Podcasts are one of the most effective ways to become a leader in your industry — whether you’re a podcast host or guest. If you’re a real estate agent or an investor who’d like to share your expertise on podcasts, unlock your free 15-minute discovery call to learn how we’ll get you there.