Investing in real estate is just about anyone’s dream. And there’s a good reason for it. There is no practical investment vehicle that can bring in returns like real estate investments do. What’s more? Real estate investments are a great way of securing income even for future years to come as the land or property is here to stay.
That said – if you have considered investing in real estate, let us first tell you that it’s a great investment decision. You may invest in securities and bonds, too, but you cannot go wrong with real estate investing.
Moreover, the real estate investing game has become so easy and accessible these days that it doesn’t require a savvy investor to be able to spend and make good returns in real estate.
Sound knowledge on how real estate investing works, understanding of making a return on investment & some help from experts is pretty much all you’ll need to spend and kick start your real estate investing game. But there’s something way more significant than all the factors we spoke of above.
The elephant in the room – the capital. The capital for investing in Real Estate. Well, money is undoubtedly one of the most important and fundamental factors that need to be considered for investing in commercial real estate. And it is one of the limiting reasons that holds back many investors from investing.
The myth? It is hard to start investing in real estate because it requires huge capital. Here’s the myth buster – Raising capital for Real Estate needn’t necessarily be as hard as it may sound.
In fact, with more private money lenders coming up in the market every day, it is not hard at all. If you know the right techniques and strategies to raise capital for your real estate, it ceases to be a challenge.
The truth of the matter is that – you don’t even need your own money to invest in real estate investments. You can use other people’s money or what is commonly referred to as OPM (Other People’s Money) to fund your real estate investments.
Now, your next question would be – why would other people be interested in financing your investments? Well, for many reasons.
To begin with – for the most obvious reason that people with capital do not have the time or experience to learn about real estate investing.
Thus they look for people who can do all the work on behalf of them, invest in properties, manage portfolios and bring them good returns for the capital they provide.
Such people are called venture capitalists. Venture Capitalists are the best way to raise money for your real estate investing when you do not have the capital yourself.
Read on and learn the best techniques and strategies to raise capital for your real estate investing. Further on, read on how to position yourself as a smart investor so that people can trust you with their money and provide you the funding that you are looking for!
Best techniques and strategies to raise capital for your real estate investing
Before talking about the ways through which one can raise capital for real estate investing, it is vital to break the myth that – it’s not possible to enter into real estate investing without significant funds.
Most of the successful investors today started small and started their real estate investing careers by using other people’s money. So, if there’s anything that can stop you from investing in real estate – it is your mindset.
Change your mindset, and you’ll open up to a world of possibilities of entering into real estate investing game without having significant funds at your end. Here are the 3 most common ways of raising capital for your real estate investments:
1) Private and Hard Money Lenders
Private money lenders and hard money loan lenders have been the best sources of building real estate investing since the time real estate investing started.
As the name suggests, both private and hard money lenders do not work like traditional banks. Thus, they do not require half as much the paperwork or the “red-tape” which would otherwise be needed in case of banks or traditional lending institutions.
However, it’s important to note that – hard money lenders are semi institutionalized lenders are will typically have a license to lend money.
On the other hand, Private money lenders are lenders who have access to capital and have a penchant for investing. They are undoubtedly the easiest and quickest way of raising capital for real estate investments as they do not require a vast amount of paperwork or cross-questioning.
They often lend money based on the property value and their judgment of how valuable can this property be as an investment option.
To be able to raise capital from private and hard money lenders, the most critical factor would be – the value of the subject property involved and the confidence an individual investor can provide to these lenders.
It is as simple as that. Your previous lending history or your credibility as a borrower is something that these lenders are not interested in.
However, you should note that the loans provided by both private money lenders or hard money lenders are short term and bear higher interest rates, in comparison to traditional or conventional bank loans.
They are often referred to as “Asset-based lending” for the reason that they base their decision of lending their capital to an individual investor based on whether the property at hand can be a worthy investment to them.
So, the best shot of raising capital through private and hard money lenders is by choosing a great property investment, to begin with, and secondly, to convince these lenders about your ability to make this investment a profitable one and to promise them great returns on the capital they’re lending in.
Although wholesaling has not had the reputation of being the best go-to option for raising capital for your investment, it is definitely worth checking out where you can get immediate funding in very little time.
When you have a promising subject property, good knowledge on the industry, and a reliable tenants’ or buyers’ list, it is very much a possibility to quickly flip a few properties by wholesaling them and invest the proceeds in rehab or use it to invest in an entirely new investment property type.
3) Self-Directed Accounts
Using Self-Directed Accounts for real estate investing is perhaps one of the most underutilized sources of raising capital for real estate investing.
Many people aren’t aware that they can use their Individual Retirement Accounts (IRAs) and their 401(k)s to invest in their real estate investment ventures.
Although using self-directed accounts may not be the best option when there’s a need for large funding, it can still definitely be a good place to start.
In a typical scenario, Self-Directed Accounts are used to fund repairing, and renovation financing needs, and the generated proceeds are later applied towards investing in much bigger projects.
The Internal Revenue Service (IRS) allows qualifying holders to directly allow their retirement savings to be used as part of their real estate investments without levying any early withdrawal penalties.
How to secure your Real Estate Investment Capital
Of the three most common ways of raising capital for your real estate business, the most appealing one would be going ahead with private and hard money lenders when banks and other traditional lending institutions are not an option.
So, the next step would be to know how to be an appealing investor to whom private money lenders are interested in lending their money. The most important part of the game for beginner investors is to build their credibility and establish trust, so private money lenders are interested in finding deals.
Here’s how you can win the trust and credibility of private money lenders and venture capitalists:
#1 – Compensate your experience with knowledge, research and an eye for every tiny detail
As a novice investor, it might be impossible for you to show experience as leverage while you’re talking to your potential private money lenders as the fact is – you lack experience.
However, remember that you can still win the confidence of your potential lenders without the experience leverage on your hat.
How? By showing them that you have adequate knowledge and your research skills have caught up with every trend real estate markets have.
You must prepare yourself with the best materials and knowledge out there and prove to your investors that you are worth – both their time and money.
Giving that confidence is all you’ll need to fuel your first commercial real estate loan. Remember here that every great investor was once a beginner, and everybody has to start from scratch.
#2 – Explain the benefits of the opportunity
Lenders are going to lend you their ears and money when you can successfully establish and explain the benefits of the opportunity that you are proposing. You may have to adopt an extremely professional way to aptly explain to your potential lenders why investing in you and your subject property is good for them.
If you can successfully answer the – what’s in it for them? Question and can elicit some excitement in your potential lenders; you’ve already won the game.
Remember to be duly diligent and knowledgeable before you can go ahead with explaining the benefits of your opportunity. Clear and honest communication might be the key to successful closure.
Raising capital is undoubtedly one of the most significant phases of real estate investing, and it can be the most daunting one, too, especially for beginners.
However, what’s important to note here is that – ultimately, it’s not only the subject property in hand that’s going to determine whether or not a lender would lend their capital to a potential investor, but it’s the confidence an investor can provide to his lender.
Bottom-line: It largely comes down to how comfortable potential money lenders feel with individual investors that determines how soon and how much capital can be raised from private or hard money lenders and the venture capitalists.