For investors in the real estate industry, raising investment capital is one of the first challenges that you will face. You need to be able to raise sufficient funds to cover the down payment on your real estate property, closing costs and brokerage fees and construction.
Because you may be relying on other individuals and investors for a significant portion of the cash needed for your projects it is important to create an investor profile that will help you to attract investors. And it is critical that you are raising capital through legitimate vehicles, whether that be JVs, partnerships or syndications and/ real estate funds. You should not take money from investors without the proper legal structure so you protect the investment, yourself and most importantly your investors.
Improving the performance of your real estate business has a lot to do with how much you spend on it and what your budget or strategy is to take it to its highest and best use. For example, how much money you can afford to buy property will determine how quickly you can reach your volume goals. And if you want to start spending money on advertising, you first need to make sure it pays off by having the funds.
There are many different ways to raise capital for real estate investing. We focus on JVs. partnerships and syndication. Once you know the vehicle you will use to raise capital you need to focus on your plan. There are certain things you should do first to ensure your success. The following steps will help you not only attract investors.
Step 1 – Always be Improving Your Credit
The first step is to improve your credit score. It’s not that potential investors will run a credit report on you– but it does give you power with your structure to work with financial institutions to get more money to use towards the projects, like construction loans. Your investment vehicle will stand as one score, as will yours. The better your credit the bigger the opportunity to get inexpensive money and leverage the deal.
This can be done by paying off any outstanding bills and not applying for any new loans until you are at a 720+. It may seem counter-intuitive, but raising your credit score is necessary in order to find banks and lenders for a loan at a great rate. Having a good credit score shows lenders that you can be financially responsible and that you have a good chance of repaying their loan. And having lenders who will loan you for the construction allows you to use the money you raise with you JV, partnership or syndication for scaling the portfolio.
Step 2 – Save up Money
Once your credit score has improved, it is time to save up some money. You should have enough saved up to pay back the loan, with some extra cash left over as profit. You will need this money to put down on the property as well as pay closing costs and other fees associated with the purchase of a property.
Step 3 – Find Investors
Once you have saved up enough money and your credit score is high enough, it’s time to find some investors. You can put ads out on the Internet or approach people face-to-face.
What Is Investment Capital?
Investment capital is money your business uses to grow. You can use it to buy supplies, inventory, rent space and employees, launch new products, or expand your business. You may need up to several million dollars for an initial outlay and ongoing financing for your operation. Your goal as a business owner should be to get the most capital for your business at the lowest cost possible.
An investor gives money to an entrepreneur in exchange for a financial stake in the business. The most common type of investment is equity financing, where the business issues stock that investors purchase as part of a company offering. Revenue-based financing is another form of investment, whereby a company receives monthly payments based on its monthly revenue. Another popular form of financing is debt financing, which allows entrepreneurs to borrow money from investors for a set period of time at an agreed upon interest rate. Contingent promissory notes are another option, where investors can receive returns on their investment if the business achieves profitability or meets other goals established by investors.
Sources Of Private Money
In order to raise money, you will have to borrow from other sources. First, you will look for private money sources. Private money is the funding that comes from either an individual or group of private individuals. The best place to find private money is through your network of friends, family, and business contacts that know you well and trust your abilities. You should be prepared to show that you have thought out how you plan on using their investment and how they will get their money back plus some profit with enough left over to buy the next property if they choose to do so.
What Are Money Partners?
Money partners, also known as capital partners or investment partners, are people and organizations that provide the primary capital for a real estate investment deal. Money partners function as the financial backer of the deal and are responsible for financing, funding and paying back any debt that’s created by it. Real estate investing often relies on money partners to supply a portion of the investor capital for a property to be acquired, developed or redeveloped through a loan or by equity investment.
How To Raise Private Capital For Real Estate
Raising capital for real estate can be a challenging feat. Few people think about the fact that real estate investments are always capital-intensive. While there are several ways to finance your property, you may opt to raise money on your own. Here are some tips to help you raise private capital for real estate:
- Make sure you have a great deal and an exit strategy
It’s important to have a strong investment plan in place before you start looking for money. Before you approach investors, make sure your deal makes sense and will continue to work even if interest rates go up or down. You don’t want to end up scrambling to find more financing options if your initial idea doesn’t pan out.
- Analyze your market
When it comes to raising funds, it’s important to know what your market looks like. There are many different ways for you to fundraise, such as crowdfunding, private lenders and more. Look at what has worked well for others in similar situations and figure out how that can apply to your project. Try not to reinvent the wheel every time you create a new project; this will save you both time and money in the long run.
Raising money for real estate has never been the easiest. It takes time, effort and money to raise capital from private investors. Here are four steps to financing your project.
1) Find an Investor Group – The first thing that you need to do is identify investors that would want to invest in a deal like yours.
2) Draw up a Term Sheet – After you’ve found an investor group, it’s time to draw up a preliminary term sheet for the deal. This will outline the basic deal points and help you get the ball rolling towards getting funding for your project.
3) Find a Trustee – If you can’t find one of your investor group members to act as a trustee on your project, then you’ll have to find someone else who will be able to hold the funds in trust during the life of the investment. A trustee will also monitor performance and make sure that everyone is treated fairly.
4) Get Your Underwriting Done – Every project is underwritten differently, but this is essentially where you get approved for your loan based on certain criteria such as debt-service coverage ratios, income producing capabilities, etc. Depending on what type of property you’re buying and what type of loan you’re getting, this could take anywhere from a few days
6 steps to raising private capital
Raising private capital for real estate is a process that both investors and developers must go through. This can be a task that many people are intimidated about, but it doesn’t have to be. You can break this down into 6 steps to make it easier on yourself, as well as take the time to do your research beforehand.
- Choose your funding source
- Build your business plan
- Determine the offer
- Nail everything down
- Negotiate your terms
- Close out the deal
Books For studying Capital Raising For Real Estate
Raising capital is a serious undertaking and requires that you arm yourself with the right tools and knowledge before starting.
Over the years I’ve collected several books that focus on managing and raising funds for your real estate business. These books have been extremely useful in helping me acquire funding for my deals as well as managing the capital I already have. This list is far from all-inclusive, but it’s a great start for anyone looking to raise capital.
Everyone looks for ways to raise capital. But not all strategies work equally well. There is a lot of information online and it’s hard to sort through it all. Here’s the best books for raising capital (or making money in your real estate investing business)
In the end, these are the steps that you must take in order to make the most of your opportunity to create wealth for yourself and your loved ones. And after you’ve gone over these things, do what other successful people do: Invest.