The Short Answer
Raising capital for real estate investing is a crucial element to a successful journey in real estate. There are various methods that you can use to do this, which is one of the reasons why the real estate industry is so attractive. 3 of the most popular options are:
- Hard money lenders: For fast, easy access to capital for real estate projects, hard money loans offer a streamlined process and flexible loan terms.
- Home equity: Using home equity loans or HELOCs is a great way to leverage existing equity to further your real estate investing goals.
- Crowdfunding: This newer method allows borrowers to get funding from a host of potential investors who each contribute towards the loan.
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6 Ways To Raise Capital For Investment Properties
Real estate investing is a dynamic world where raising capital is the key that unlocks the door to potential profits. Finding the right real estate deal is one part of a successful strategy, but acquiring capital to fund these purchases is what brings the strategy to life in the real estate market.
To help you navigate the financial landscape of real estate investing, we’ve put together 6 of the best ways to raise capital for investment opportunities.
1. Hard Money Lenders
How It Works
Hard money lending is a quick way for real estate investors to get funding, without all the red tape of traditional loans. Hard money lenders typically provide loans based on the real estate deal itself, in other words the property is used as collateral to secure the loan. This is a good solution for those who have a credit score that isn’t ideal.
Hard money loans are usually short-term loans that range from a few months to a couple of years. They are specifically designed for buying and renovating properties. Typically, hard money lenders offer up to 70-80% of the property’s appraised value, and the borrower must contribute the remaining amount.
Benefits
- Fast funding: Hard money loans can provide funding in as little as a few days, with the likes of New Silver providing loans in just 5 days.
- Flexible terms: Hard money lenders aren’t subject to the same stringent regulations as traditional loans which means that hard money loan terms can be tailored to each real estate deal.
- Less stringent requirements: Hard money loans have less stringent lending requirements, which means that credit history is less important. The quality of the real estate deal is the most important aspect of these loans.
- No prepayment penalties: Hard money lenders generally don’t have any penalties for those who pay off the loan early.
Drawbacks
- Higher interest rates: Due to the riskier nature of hard money loans, there are higher interest rates on these loans. Interest rates can be anywhere between 6% and 15%, depending on the lender.
- Short repayment period: The short-term nature of hard money loans means that investors need a solid exit strategy in place, in order to repay the loan on time.
- Risk to asset: With hard money loans, the asset is being used as collateral and therefore is at risk, if you were to default on the loan repayments.
How To Apply
Once you’ve found a reliable and reputable hard money lender, you’ll need to check on their loan requirements and make sure that you can comply with these. This includes the documents that they require, the minimum FICO score, LTC or LTV and other requirements. Next, you should put together a strong proposal that outlines your project, including the purchase price, renovation plans, budget, timeline and expected ROI.
Once you’ve supplied your proposal, filled out a loan application and provided the documentation required, you’ll need to negotiate the loan terms with the lender. These will include the interest rate, loan duration, associated fees and more. Then you’ll perform due diligence on the property to ensure that it aligns with your investment goals and the lender’s requirements. From there, you can close the deal and continue your investment opportunities.
2. Crowdfunding
How It Works
Real estate crowdfunding is a new-age way to raise funding for real estate deals using a number of potential investors who pool their resources to provide capital. Each crowdfunding platform provides the opportunity for real estate investors to present their deal by giving information about the property, the expected returns, and the amount of capital they require.
Investors will then contribute the amount they choose, towards the project and once enough funds have been raised, you’ll be able to continue with your investment project. Investors will receive returns based on the property’s performance or sale, depending on the strategy.
Benefits
- Easily accessible: Real estate crowdfunding opens up doors for many investors as the platforms are easy to access. Applicants simply need a good real estate deal, and they could get access to the funding they need easily.
- Transparency: Crowdfunding platforms offer complete transparency between the applicants and the potential investors, which makes this solution a great way for everyone involved to be on the same page.
- Less requirements: Crowdfunding is a great way for those who have a less than desirable credit history to raise the capital they need to make profit-generating real estate investments. Investors are typically concerned with the deal itself and may not be as concerned with the applicant’s financial standing. Crowdfunding doesn’t have the same requirements as traditional loans and investors can decide who they want to provide funding for.
Drawbacks
- Platform risk: The success and integrity of your investment can depend on the platform’s management and financial stability. Be sure to research the platform’s track record and reputation.
- Increasing competition: As crowdfunding becomes more popular, investors are looking for the most attractive real estate deal. This may make it more difficult to generate enough capital and stand out from the crowd.
- Regulations: Crowdfunding platforms are subject to their own regulations, in each jurisdiction, and you’ll need to be familiar with these in order to
How To Apply
The first step is to make sure that there is a need for your project and that there is an investor demand for it. Then you can choose a crowdfunding platform that suits your investing needs and is likely to be the best place to find the potential investors who would be interested in your project.
Once you’ve created an account on the platform that you’ve chosen, you’ll need to put together a compelling proposal. This should include a detailed description of the project, including all the financial details and the investor’s likely ROI. Make sure to include a personal element, such as a video, to give the investors a human element. Once you’ve completed this and submitted it, you’ll wait to see if you can gain enough overall investment to complete your project.
3. Using Your Home Equity
How It Works
Raising capital for real estate investment projects using home equity involves leveraging the equity you have already created in a property. To calculate the equity you have in a property, you can subtract what you owe on your mortgage from the market value. A home equity loan, or a home equity line of credit (HELOC) can be used to this. These options both provide different solutions for those looking for funding.
A home equity loan provides a lump sum with a fixed interest rate that is repaid over time, while a HELOC provides a line of credit that can be borrowed as needed with variable interest rates. Home equity loans operate as a second mortgage, where the entire loan is adjusted as per the amount of equity that has been taken out.
Benefits
- Lower interest rates: Due to the fact that it’s not a new loan, and the loan may even be expanding and being repaid over a longer period, the interest rates may work out lower. This makes home equity loans more affordable, particularly for funding real estate investment projects.
- Tax benefits: In some cases, the interest on home equity loans may be tax deductible.
- No usage restrictions: The funds provided by home equity loans can be used for anything. So, investors can use this for a down payment on another property or to renovate a property they have just bought.
- Swift financing: You can gain access to funds from home equity quicker than many other loan types which is a great solution for time-sensitive projects.
Drawbacks
- Home is at risk: Defaulting on a home equity loan means that your home is at risk, because your home serves as collateral for the loan.
- Reduced home equity: While leveraging your home equity can be a great investment solution, it also means that you are reducing or entirely eliminating the equity you have in your home.
- Qualification requirements: To qualify for a home equity loan, you’ll need a good credit score and enough home equity, along with any other specific requirements that each lender will have.
How To Apply
First things first, you should evaluate the amount of equity you have in your home by subtracting your mortgage balance from your home’s current market value. Once you’ve completed the lender’s application process, which would include providing documents, getting the property appraised and doing a credit check, the lender will offer you a home equity loan or HELOC.
Once you’ve received the funds, you can use them for your real estate investment purposes, whether that be a down payment on a property or renovating a property to generate more income from it.
4. Traditional Bank Loans
How It Works
Traditional banks and financial institutions also offer loans for those raising capital for real estate. These loans will require a detailed business plan to be developed first, which outline the investment strategy, expected returns and the repayment plan. The bank will require this business plan, along with personal and financial information, and details about the property.
The bank will assess your creditworthiness, which plays a huge part in getting approved for a traditional loan, and then evaluate the value of the property. You may be required to make a down payment of between 15% and 25% of the property’s purchase price. Once the loan is approved, you’ll go through the closing process and sign the relevant documents.
Benefits
- Low interest rates: Banks can offer lower interest rates than other lenders, which means that these loans may cost less overall.
- Fixed loan terms: Traditional loans typically come with fixed loan terms, which can be a big benefit for investors who want to have predictable repayment terms.
- Lower monthly repayments: Due to the fact that banks provide longer repayment terms, the monthly repayments on these loans can be lower.
- Property ownership: Using a bank loan means that you can retain full ownership of the property which means you can reap the rewards of property appreciation and rental income.
- Building credit: Successfully repaying a bank loan can help improve your credit score, opening doors to future financing opportunities.
Drawbacks
- Strict qualification criteria: Getting a loan through a bank means adhering to strict qualification criteria, such as high credit scores and specific debt-to-income ratio.
- Substantial down payment: Bank loans come with a substantial down payment requirement, which can be limiting for the initial investment capital outlay.
- Long approval process: Traditional institutions have a much longer approval process, which means that funds take longer to be paid out and this isn’t ideal for time-sensitive real estate deals.
- Large amount of documentation: The stringent approval process that banks require includes a large amount of documentation. This can be time-consuming to prepare and confusing for those who are doing it for the first time.
How To Apply
Applying for a bank loan includes a credit score review, and financial history analysis to determine that you meet the bank’s criteria. Make sure to select a traditional financial institution that meets your real estate investment needs. Then it’s time to gather all the documents needed and apply for the loan. You’ll need personal financial statements, your business plan and details about the property.
Once the loan has been approved, the bank will provide the loan terms which will outline the interest rates, loan terms, and fees. After you agree to the terms, loan closing will begin and the property purchase can be made.
5. Private Money Lenders
How It Works
Private money lenders are individuals or companies that provide funding to borrowers who are raising capital for real estate. Private lenders are not affiliated with traditional financial institutions in any way, and as such operate quite differently. Private lenders can include friends, family and other investors who are interested in real estate projects.
The relationship between borrower and private lender is the key to these loans, which have flexible terms as the lender is in charge of setting the terms as they see fit. Once the terms have been agreed upon between the parties they will sign a contract of sorts, whether that be a promissory note, deed of trust or other agreement.
Benefits
- Flexible terms: One of the biggest drawcards for private money loans is the flexibility that comes with not borrowing money from a heavily regulated lender. Private money lenders can offer tailored loan solutions that suit each borrower’s unique needs.
- Fast access to capital: Borrowers can get funding very quickly through private money lenders, which can be the difference between capitalizing on a good real estate deal or missing out.
- Lenient lending criteria: Private money lenders are usually more focused on the real estate investment and its performance, than the borrower’s creditworthiness. Which means that this method provides a greater level of accessibility for borrowers.
- Relationship building: The key element of working with private money lenders is building relationships. This can be very beneficial in the long run, to get access to funding for future projects.
Drawbacks
- Higher interest rates: Due to the increased level of risk associated with private money loans that operate outside of the formal banking system, these lenders will typically charge higher interest rates.
- Limited regulations: Private money lending is less regulated than traditional banking, which can increase the risk of unscrupulous practices. It’s crucial to conduct due diligence on potential lenders.
- Relationships are at stake: If the investment doesn’t go as planned, and the private lender is a personal friend or family member, this relationship could be at risk.
How To Apply
Finding a private money lender is the first step towards being able to access capital this way. This means finding a friend, family member or investor who is willing to fund your investment project. Once you’ve found a lender, you’ll need to pitch your idea to them so make sure that you can clearly articulate your investment plans.
Next, you’ll negotiate the loan terms and sign an agreement once these have been agreed upon. Once this is signed, you’ll receive the funds and be able to use them for your real estate investment. Make sure to keep up the communication with your lender, so that they know what’s being done with the funds.
6. Peer To Peer Loans
How It Works
Peer to Peer (P2P) lending takes place on specific lending platforms that connect borrowers with individual lenders. Borrowers sign up to a platform and then get connected with lenders who match their specific real estate investment loan needs. This is defined by the project itself, and how much capital the borrower is looking for.
Once a borrower has submitted a loan request on the platform, they are assessed in terms of creditworthiness, risk and more, to determine the loan terms. Then the loan is listed on the platform for lenders to review, and once a lender has decided to contribute towards the loan, they will do so. Lenders will receive returns on the investment through the platform.
Benefits
- Streamlined online process: P2P lending platforms offer online processes that are typically easy to do. This makes lending quicker and easier for borrowers.
- Competitive interest rates: P2P lending can provide better interest rates than many other loan types, depending on the project and the level of risk.
- Capital access: There’s a large pool of investors on a P2P lending platform, which means that there’s a diverse source of capital for your real estate project.
Drawbacks
- Interest rates higher than banks: While P2P lending can offer competitive rates, interest rates may still be higher than those offered by traditional banks, especially if your credit score is lower.
- Risk assessment: P2P lending platforms will perform a stringent risk assessment process for each project, and this can result in higher interest rates, or difficulty securing funding.
- Loan limits: P2P lending platforms may have limits on the amount you can borrow, which could impact your ability to fund larger real estate projects.
How To Apply
Research and select a reputable P2P lending platform that facilitates real estate investment loans. Then sign up to the platform by providing all the necessary personal and financial information. Submit a detailed loan request outlining your real estate investment project, including property details, investment strategy, and the amount of capital you’re looking for.
Your creditworthiness and risk will then be assessed. Once you’ve been approved, you can submit your loan request to the platform and lenders will review this. You may have lenders contributing a portion towards the loan or covering the entire loan. Once you’ve received funding, you’ll confirm the loan terms and if your loan is fully funded, the platform transfers the funds to you for use in your real estate investment.
Obstacles That Can Prevent You From Raising Capital
Obstacle 1: Credit History
A poor credit history can be a challenge for those raising capital for real estate investments, because certain lenders use a borrower’s credit history as a risk assessment tool. Which means that borrowers with a poor credit history can be seen as high risk and therefore higher interest rates will be given, or the loan may be rejected entirely.
Obstacle 2: Lack of Experience
If you’re a new investor without a proven track record in real estate investing, lenders may view you as a higher risk. Having a history of successful projects in the real estate industry can significantly enhance your credibility. Without any experience, lenders may be less willing to provide a loan as they have no guarantee that your real estate project will be successful.
Obstacle 3: Limited Down Payment
Most financing options require a down payment, and for borrowers who aren’t able to secure a full down payment, this can be a barrier to obtaining a loan altogether, or securing favorable loan terms.
Obstacle 4: Insufficient Income
Lenders will evaluate a borrower’s income, to make sure that they can afford the loan repayments. An irregular income, or one that won’t sufficiently cover the monthly repayments can be a stumbling block for obtaining funding.
Obstacle 5: Inadequate Business Plan
Lenders base their decisions on the business plan, so this is a crucial element of securing funding for real estate investing. If real estate investors submit a business plan that isn’t detailed, is missing information or is incorrect, this can hinder their chances of getting the financing they need for their project.
FAQ
Buying property with none of your own money is possible for real estate investors, however it involves specific funding strategies. One such example is seller financing, where the property seller effectively acts as the lender and the buyer can make payments towards the property, directly to the seller. In this case, however, certain conditions will need to be met for a seller to consider this avenue, and the buyer may not require any of their own money.
Banks may reject real estate investing loan applications for various reasons, such as:
- Limited experience
- Low credit score
- Limited loan to value (LTV) ratio
- Low income
- Unfavorable debt to income (DTI) ratio