A Comprehensive Guide to Raising Capital in Commercial Real Estate Investing

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Both novice and experienced investors may need help to raise money for real estate projects. However, you’ve come to the right site if you want to improve your capacity to raise funds for your upcoming multifamily real estate purchase.

Even after numerous thriving capital raises, seasoned capital raisers assert that they never know exactly how much they will be able to raise for their next real estate investment.

This demonstrates how worry and uncertainty about where to find the necessary capital are frequent among real estate investors.

It’s acceptable if you don’t like raising funds but know you have to if you want to expand your multifamily company. Non-residential properties like shopping malls, office spaces, and others that generate income are categorized as Commercial Real Estate (CRE).

Commercial real estate investment generally represents a large sum of money provided b any individual retail investor. You can invest in CRE (Commercial Real Estate) through fractional ownership or REITs (Real Investment Trusts).

What is Capital?

Capital means anything that confers value or benefit to its owners. Generally, capital is associated with liquid money, which is used for progressive investments. There are two types of capital, namely debt and equity.

Understand debt is the amount the borrower owes to the lender. Real estate usually comes from banks, private lenders, or peer-to-peer lending networks and includes loans to developers of multifamily properties, retail and shopping developments, industrial, etc.

A claim on the property in the form of a mortgage or a deed of trust secures debt holders.

Equity makes up the difference between the purchase price and the amount of approved debt. It’s the amount of money you’d receive after paying off the mortgage if you were to sell the home.

What is Capital Investment?

Capital investment is the acquisition of physical assets by a company to further its long-term business goals and objectives.

Commercial Real estate investors often use the term “capital stack” to represent the financing sources. These sources are used while financing any real estate deal.

What are the Different Ways To Raise Capital for CRE (Commercial Real Estate Investing)?

  1. Loans

Real estate loans can be of different types and aspects.

Loans are the amount you borrow to buy a property. It can be as simple as a bank loan or even a mezzanine debt offering. Check out some of them:

  • Bank Loans: Bank loans vary in terms and are issued to real estate investors by banks. The bank reviews the investor’s financial position and the prospects for the property being acquired. Interest rates on bank loans are competitive and can be found by consulting with a loan officer.

 

  • Private loans: Private loans are issued by individuals or companies that are not primarily in the business of lending money or through personal relationships where an individual is looking for lending money to secure interest on their savings. In a private loan, lenders and borrowers negotiate the terms and conditions. Moreover, the terms and conditions of a personal loan may vary depending on the perspectives of each party.

 

  • Hard money: Hard money loans are issued by lenders specializing in lending to real estate investors, especially those looking to pursue value-add strategies. Hard money lenders do not provide loans as per the borrower’s financial strength but according to the deal’s prospects. These loans come with a shorter repayment term than private or bank loans. However, the interest rate of such loans always remains the highest.
  1. Partnership

Two or more individuals are involved in a partnership deal, and each partner contributes their equity shares. In partnership, each individual is entitled to their calculated share of the income and profits produced by the property.

Suppose the property needs a major repair or the rent is insufficient to support the operating expenses. In that case, the partners may have to put in their “pro rata” or calculated share of the money needed to keep the property running.

However, all the partners gain the company’s direct ownership by investing their funds. This is counted as the most significant benefit of the partnership.

The major downside of a partnership is it can become very complex if more than one partner can fulfill their financial obligations or is particularly opposed to a major decision.

  1. Crowdfunding

Crowdfunding is when you acquire a minimum amount of capital from several individuals to finance a new start-up. Several companies provide a platform for individuals to advertise their investment opportunities to an audience of investors looking to crowdfund commercial real estate deals.

In this, individuals purchase shares in the company, which in turn owns the property. Each investor is entitled to their “pro rata” or calculated share of income and profits.

In this approach, funding the deals is much easier and faster. This is because an in-house team of individuals looks into these funds actively. So if you are trying to close a deal under hectic deadlines, crowdfunding can be the ultimate help.

The downside of this approach is that these competitive platforms charge fees, which cut into the amount of equity raised.

  1. Self-Directed IRAs

As the name suggests, IRA or Individual Retirement Account is a type of pension in the USA. In addition, several financial institutions provide tax benefits on retirement savings.

A trust purchases assets with a taxpayer’s income and invests it for the taxpayer’s old age benefits. In a self-directed IRA, the account holder has a broader scope regarding the assets they can invest in – including commercial real estate deals.

When working with investors to tap self-directed IRAs, one may get access to more capital. This capital is even higher than the taxable accounts.

The downside is one may require some additional educational effort to alert potential investors to this option. Moreover, it needs to be ensured that the investment has been processed without any tax liabilities. So, there may be some additional administrative tasks to find it out.

  1. Syndication

Syndication is a two-tiered structure that allows investors to buy partial shares of the real estate without getting involved in the management of the project.

A deal leader organizes the syndication, or “General Partner,” and they do all the hard work of finding, financing, and managing the property. Moreover, they work to raise the required equity that can close the purchase.

The other party in the deal, “Limited Partners,” contributed capital to the deal. They can be recent or past investors in other deals that the General Partner has also offered. These people invest their own money and profit passively from the property.

The advantage of this strategy is that it can be applied on a broad scale, making it a successful means of raising several other people’s money. The advantage of this strategy for investors is that they get all the benefits of owning commercial real estate without any effort in managing the property.

The drawback of this strategy is that conducting this type of fundraising in a highly competitive market can take time and effort. In addition, deal leaders frequently demand fees under this strategy, which can reduce earnings.

Raising Capital in Private Equity Real Estate

Private Equity Real Estate comprises collectively managed public and private real estate investments. It is an alternative asset class.

The buying, financing, and ownership (direct or indirect) of individual property or properties through an investment pool are all components of investing in private equity real estate.

Usually, the private equity firm acts as the General Partner. It is responsible for building relationships with a network of private investors to source the remainder of the down payment needed to get the deal closed from “Accredited Investors” who want to allocate money to the transaction.

Individuals receive their proportionate part of the rental income and profits generated from the individual property or collection of properties in exchange for their investment.

Conclusion

For raising capital in Commercial Real Estate, your business model should show investors’ potential and credibility. Moreover, it would help if you also showed that you are offering them a genuine opportunity to make money — whether from real estate selling or buying or renting it to tenants.

Real estate is a people business, and professional investors know that well. Therefore, cooperation between two or more parties involved in a transaction can be a successful venture.

If you utilize the same approach as other investors, raising money to finance your real estate ventures will be easy.

Please don’t be shy about letting people know that you connect other people’s money with investment opportunities because it benefits them! Building your investment portfolio and assisting more passive investors in achieving their financial objectives depends on leveraging other people’s money.

Want to learn more? Get in touch with us today.

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