How does raising capital actually work?
Real estate is generally a great investment option to begin building wealth. It can generate ongoing passive income and can be a great long-term investment. There isn’t an investment vehicle more capable of helping individuals achieve financial freedom than real estate.
But do I need cash? While capital is absolutely necessary to invest in real estate, there is no rule to suggest the money must come out of your own pocket. In fact, you don’t have to invest any of your own money at all; it is entirely possible to invest in real estate solely through the use of other people’s money.
However, if the money isn’t yours to begin with, you must devise a strategy to attract others that may be interested in funding your real estate ventures. In doing so, you need to be willing to sell respective investors on yourself as much as the impending deal.
In reality, venture capitalists are ready and willing to lend their money out to those that can give them a solid return. Your mission, is to convince them that you are worth investing in. Outside of the deal in question, potential investors will gauge the viability of an investment opportunity on the individual asking them for money, aka you! Take time to learn what venture capitalists look for in the right investor before reaching out for cash.
Funding
Real estate ventures need one thing: funding. Raising money for real estate deals is vital, and it can be argued that it’s the foundation of every deal. Therefore, investors must familiarize themselves with the most efficient ways to not only receive appropriate funding, but also gain access to it in a moment’s notice. Learning how to raise capital for real estate is not as hard as many new investors make it out to be. There are many lenders who are ready to give their money to a worthy borrower; investors just need to know where to look.
So what is the most common source that investors have come to rely on when it comes to securing capital?
Private & hard money lenders
Private & Hard Money Lenders
The most popular source of funding for real estate investors is hard or private money lenders. Hard money lenders are organized (semi-institutionalized) lenders who are licensed to lend money. Private money lenders, on the other hand, are individuals with access to capital and a penchant for investing it. While these two types of lenders exercise subtle differences, these alternative sources of funding have become the easiest and most direct source of capital for real estate investing.
Private and hard money lenders aren’t associated with institutionalized banks, and therefore aren’t subject to nearly as much “red tape”. Instead, these lenders tend to work for themselves, and are usually actively looking to lend out their own funds to those in need. Due to their alternative nature, these lenders can award investors with short-term, high-rate loans based primarily on the subject property. Otherwise known as asset-based lending, private and hard money lenders will base their decision to lend money out on whether the property in question appears like a worthy investment. That means investors don’t need to have a perfect credit score to receive approval, but rather a good work ethic with an even better subject property.
So what do the lenders want in return?
In return for granting access to their capital, most private and hard money lenders will ask for approximately twelve to fifteen percent in interest, and perhaps even a few additional points. Understandably, their rates are much higher than traditional banks (nearly three times higher), but these lenders can award investors with almost immediate access to capital. Banks, on the other hand, may take a long as two months to provide funds. In the time it takes to receive money from a bank, opportunities can be lost. Therefore, the speed of implementation granted from private and hard money lenders has made raising capital for real estate deals much easier and more beneficial for the borrower.
What are some of the most important characteristics venture capitalists and private money lenders look for in those who want to raise capital for real estate ventures?
Experience. Team Work. Benefits of the deal
Summary
Raising capital for real estate investing is crucial for every real estate investor. However, selling yourself as a reliable borrower is just as important as the deal. While the property in question is a large reason people will lend money, it is only a fraction of the equation; lenders want to feel comfortable with those they are giving their money to. The most successful lenders, connect with the best investors; those that will take the best care of their money and return it with interest.
