Have you ever wondered what really works in raising money for real estate deals?
Investing in real estate has become synonymous, and for good reason, with the American dream; just about everyone can do it. However, there is no investment vehicle that is more capable of helping individuals achieve financial independence than real estate. The housing sector is currently firing on all cylinders, and there is no reason why people can not get in on the action. The entry barrier is so small that all you need is the right amount of zeal, a little due diligence and good knowledge concerning real estate.
Nevertheless, it is important to remember that something of immense significance from that list is missing: capital. While capital is absolutely necessary to invest in real estate, there is no law to imply that the money must come from your own pocket. In fact, you don’t have to invest any of your own money at all; investment in real estate is entirely possible only through the use of money from other people, or what I like to call OPM.
That said, if the capital isn’t yours to start with, you need to formulate a plan to draw those who may be involved in financing your real estate projects. In doing so, you need to be able to sell the respective investors on your own just as much as you might or may not have lined up on the upcoming offer.
In fact, venture capitalists are willing to lend their money to those who can produce a solid return. Your mission is to persuade them that you are worth investing in. Outside the deal in question, prospective investors will gauge on the feasibility of an investment opportunity on one thing: the person asking them for money – you! You have to persuade the venture capitalists that you are worth their time and resources. If you want to know how to collect real estate money, first take it upon yourself to find out what venture capitalists are searching for in the right investor.
What Are Real Estate Ventures?
Real estate ventures are exactly what they sound like: entities that play an integral role in most large real estate projects being developed and financed. On the other side, joint real estate projects will see two individual partners teaming up to take on a single project.
How To Raise Money For Real Estate Investing 4 Different Ways
One thing Real Estate projects require, maybe more than anything else: capital. This is of the utmost importance to raise funds for real estate deals and it can be argued that this is the cornerstone of any contract. Investors must therefore familiarize themselves with the most effective ways not only of securing sufficient funding but also of obtaining access to it in a moment’s notice. Nonetheless, it’s worth remembering that learning how to collect real estate capital isn’t as hard as many new investors find it. There are plenty of lenders waiting to literally offer their money to a worthy borrower; investors need only to know where to look.
Although there are many ways to secure working capital, there are four sources on which investors have come to rely more than any other:
- Private & Hard Cash Loans
- Self-Directed Accounts
- Private Placement Memorandums
Private and Hard Money Lenders
Hard money lenders are semi-institutionalized lenders that are structured and are usually allowed to lend money to those in need. On the other hand, private money lenders are people with access to capital and a passion for investing. While these two types of lenders exert subtle differences, these are undoubtedly the most popular loans and source of financing for the real estate investors today. Those alternative sources of funding, if for nothing else, have become the easiest and most direct source of capital for real estate investment.
As their names suggest, private and hard money lenders are not affiliated with institutionalized banks and are thus not subject to as much “red tape.” Rather, these lenders appear to work for themselves and typically actively try to lend their own funds to those in need. These lenders may reward investors with short-term, high-rate loans based primarily on the subject property, because of their alternative nature. Also known as asset-based lending, lenders of private and hard money would base their decision to lend money out on whether the property in question looks like a worthy investment. That means investors do not need a perfect credit score to get approval, but rather a good work ethic with an even better subject property.
In exchange for granting access to their funds, most private and hard-money lenders would ask for interest of about twelve to fifteen percent, and maybe even a few additional points (a form of prepayment interest). Understandably, their rates are much higher than traditional banks (nearly three times higher), but those lenders can award near-immediate access to capital to investors. In comparison, banks can take up to one to two months to provide funds. Within the time it takes to get money from a bank, most options are already lost. Hence, the pace of execution granted from private and hard money lenders has made it much easier to raise capital for real estate deals than in previous years.
As probably the most overlooked — and maybe even underused — source of money, retirement plans have acted as an extremely stable source of funding for many of today’s real estate projects. If for nothing else, far too many investors are unaware that their 401(k)s and Individual Retirement Accounts (IRAs) can also be used to invest in real estate. The Internal Revenue Service (IRS) provides qualifying account holders with the option of self-directing their savings into real estate investments without any kind of early withdrawal penalty. Of course, a custodian must keep the account that enables account holders to handle the assets themselves.
In the event that their account is self-directed, investors will use the funds in their retirement accounts to purchase real estate. That said, all of the income earned must be returned to the account it originated from. Profits would, however, be permitted to expand tax deferred. Investors would therefore not be able to spend the money immediately, but the resulting tax shelter can increase their income.
Private Placement Memorandums
Nonetheless, private placement memorandums are a great source of funding, yet easily the most misunderstood strategy for raising capital for real estate investment. As their name would leave many to believe, memorandums for private placement are close to private offerings. However, to be more concise, a private placement grants real estate developers the right to raise money through the selling of shares to other investors.
Although not commonly seen as a source of financing, the wholesaling method has established a reputation for rewarding experienced investors with fairly speedy funds. Perhaps even more importantly, using contract strategy allocation may not even require upfront funds. Perfectly implemented, it is entirely possible to make money in as little as a few hours on a wholesale deal without using the resources of any of the investors. That said, wholesaling is an exit strategy, and is not guaranteed at all, but with proper industry expertise, attractive subject property, and a robust buyer list, wholesalers can be able to flip a few properties and invest the proceeds in renovations. While not a traditional source of financing, wholesaling is sure to help investors interested in raising capital for real estate deals.
How To Secure Real Estate Investment Capital
It requires investors to know more than where to find sources to raise capital for real estate deals; it also requires them to know how to secure the money once they know where to get it. Consequently, after investors have learned where they need to find the money, they will then learn how to respond to those who have the money. Again, countless lenders are only waiting to lend their funds to investors today. It is up to the investor to show, though, that they are worth the investment.
Let’s take a look at some of the most relevant venture capitalist characteristics and look for private money lenders among those who want to collect capital for real estate ventures:
- Show off your experience
- Define the structure of your team
- Explain the benefits of chances
It should go without saying, but the more confident the investors are with investing with you, the more likely you are to get money. Experience goes a long way in building trust, and thus in raising capital for investment in real estate. Nothing has the ability to instill confidence in those parting ways with a large sum of money than experience; the peace of mind that it creates can not be underestimated.
But experience isn’t something every investor has the luxury to boast about. For that matter, new investors have basically no experience to offer at all. With that in mind, how can the lack of experience make up for new investors?
It’s important to remember that even the most successful investors once were inexperienced; no one can boast years of experience right out of the gates. Therefore new investors are advised to compensate for their lack of preparedness, knowledge and acute attention to detail. You would be surprised to see how far even the most inexperienced investors can go with a bit of due diligence and driving force. You need to handle yourself with confidence at this point; don’t allow your experience, or lack of it, to take center stage on a given offer.
In fact, venture capitalists and lenders of money are looking to work with those they feel comfortable to offer their money. If, with years of experience, you can not persuade them that you are the horse on which to bet, do so by giving them peace of mind. Prove to those you are going to borrow from that your homework was done with as much expertise as possible.
The best investors are well-aware that immovable property is a people business. Every single transaction requires, the cooperation of at least two parties. That said, if you want to know how to raise capital for real estate projects, you need to work well with others – your own team in particular.
Private money lenders should concentrate on, and with good reason, the ties you have with your team. A professional team that has the right leader can do just about everything. But what makes a team of pros? What are the money lenders looking for in your team before they decide to give you the necessary capital to fund a deal?
Learning how to raise capital for real estate projects begins at the composition of the team. Before you even consider asking for money, make sure your team displays the following qualities:
- Zeal: The strongest teams show a contagious passion. It’s important to remember, though, that the passion begins at the top and trickles down. You yourself must be passionate about your future goals to lead a passionate team. Let people know how excited you are about your company’s future and I guarantee the thought of working with you will inspire people. They’ll at the very least know that your heart is in the right place.
- Tenacity: Not much different from passion, tenacity compliments it and gives entrepreneurs the stamina to see their dream through to the end. Some say tenacity is all that’s separating a decent investor from a great one. While the jury is still out on that, there is no doubt in my mind that an innate tenacity of a team will go a long way in persuading others to work for you.
- Flexibility: Agile businessmen are fundamentally rigid. That said, due to their inability to adapt, rigid investors are more susceptible to suffering complications. For that matter, versatility awards an incentive for investors to think on their feet and roll with the punches. The most successful businessmen of our time have always demonstrated an ability to be flexible; nothing has the ability to minimize risk, much like the ability to adjust to changing circumstances.
- Dedication: For an entrepreneur, few things are more important than his or her team and few things are more important to a team than dedication. Even the most talented real-estate teams will fall apart without it. As an investor, illicit unwavering commitment by those you choose to work alongside is in your best interest. At the very least, I can guarantee you prospective investors would want to see some degree of dedication from those to whom their money is entrusted.
- Teamwork: Otherwise referred to as chemistry, teamwork is basically the barometer on which most external investors decide. A team that can work together without getting in its own way is a force to be reckoned with and venture capitalists are more than aware of their influence. Prove to investors you can work well with others and most likely they will want to work with you.
- “Coachability”: I think you’re ignorant when you’re not coachable. The cleverest people are the ones who know they don’t know everything. Humility can go a long way to winning other people’s confidence. If you’re not only able to obtain knowledge but admit when you’re wrong, you’re going to open up a whole new world of working in tandem with others.
- Knowledge: Information is maybe more powerful than any other attribute on this list; it is your most valuable asset. Awareness should ensure that everything is in working order. If for nothing else, good knowledge in real estate is the single most valuable quality a team can boast of.
Again, one of the easiest ways of raising capital for real estate investments is to persuade money lenders that their time is worth it. Nothing will convince lenders to give you money faster than the opportunities that you present to them. More specifically, the deal that you are looking to fund should spark some excitement. Remember, you’re the one who raises real estate investment capital. It is up to you to convince them that they should lend you money. The house in which you plan to invest will be doing the majority of the job. That said, run the numbers yourself and have a justification for lenders to think that their money isn’t better spent elsewhere.
You’re going to want to be upfront at this stage, and reveal your intentions. Tell them how much you’re seeking, and what potential return on an investment in your business. Leave no stone unturned as smart money lenders want their risk mitigated as much as possible. If you don’t know the answer to questions that they pose, you have a lot of research to do. It is up to you to take everything into account on a deal. If you can prove to them that you dotted all your I and crossed all your t’s, then the right opportunity will sell itself.
Successfully investing in immovable property would require risk reduction, and private money lenders are no exception. They are not throwing away money into the business. They’re going to want to make sure the chance you’re giving them is a sure thing.
It is an integral step for every real estate investor to raise capital for real estate investments. But few are aware that they do not sell lenders on their respective deals, but rather themselves. Although the property in question is a major reason people can lend money, it’s only a fraction of the equation; borrowers want to feel secure with those they give their money to. For that matter, the most successful lenders have learned how to classify the best investors; the ones who will take better care of their money and return it with interest. Be sure to exercise these traits on a daily basis if you want to be the investor lenders line up for.