Real estate investing is one of the most profitable businesses globally. Here are some of the benefits you can enjoy from buying an investment property:
- Equity for the future
- Potential for a high return on investment
- Cash flow for retirement
- Hedge against inflation
- Tax breaks due to depreciation
- An alternative strategy for saving for college education
- Property appreciation over time
Related: 7 Major Benefits of Investing in Real Estate
One of the main challenges for new property investors, however, is raising capital for real estate investments. In reality, getting funding for income property is not that difficult if you go about it the right way. And we can show you how in this guide.
So, What Is Investment Capital Exactly?
This refers to the money used to fund a real estate venture. This money could cover the costs of buying an investment property, initial renovations, and other extra costs. There are two main kinds of investment capital: equity and debt.
How to Raise Capital for Real Estate: 6 Different Ways
Want to know how to raise capital for real estate? There are many other ways apart from saving to buy a house. What makes property acquisition possible for other investors is Other People’s Money (OPM). Experienced real estate investors have learned how to use OPM to maximize returns and reduce liability.
With that in mind, here are different ways to raise capital for real estate investing:
1. Traditional Investment Property Financing from a Bank
Bank mortgages are one of the most popular methods used to raise capital for real estate ventures. Banks usually assess applicants’ debt to income ratios, credit histories, and assets by looking at documents such as:
- Recent payslips
- Bank statements
- W-2 forms and tax returns
- Credit history
Your chances of getting approved for a mortgage or investment property loan will be high if you have a great credit score, minimal debt, and a stable income.
2. FHA Investment Loan
If you want an investment loan with lower requirements, you could opt for the Federal Housing Administration (FHA) loan. Since such loans are insured by the FHA, lenders offer friendly terms. For example, the down payment for investment property required for an FHA loan is only 3.5%, unlike other lenders that charge 20%. However, to qualify for this low offer, you must have a FICO score of not less than 580. In addition to this, FHA loans are usually reserved for owner-occupied properties. In order to make it work for an investment property, you must use the loan to purchase a multifamily home, reside in one unit, and rent out the others. This will mean earning a rental income while living rent-free. Based on the time set by your mortgage lender (usually up to 1 year), you can then move out and rent out all the units. So if you are thinking of how to buy a multifamily property with no money, an FHA loan is the way to go.
Related: Can You Use FHA Loan for Investment Property Financing?
3. Peer-to-Peer Loan
Crowdfunding is becoming increasingly popular as a strategy to raise money for real estate investing. According to Allied Market Research, the global peer-to-peer lending market is likely to hit over $460,312 million in 2022. This unconventional funding method is therefore worth considering when buying a house for investment.
So how does it work? A crowdfunding marketplace simply matches lenders (investors and individuals) via an online service. With the low overhead costs involved, P2P loans are more affordable than conventional mortgages. Though a good credit score is required, you can still get approved for a loan with a less than perfect score.
When evaluating P2P loan platforms, be sure to check the following aspects:
- Data security features
- Required upfront origination fees
- Privacy policies regarding personal data
4. Private Money Lenders
Private money lenders are individuals that have access to capital which they wish to invest. Such lenders are not affiliated with any financial institution and bank and therefore deal with borrowers directly. Since private lenders don’t have as much ‘red tape’ as traditional lenders, the financing process is much faster and stress-free.
Money raised from real estate partnership with private money lenders can be used for:
- Refinancing a property – Let’s say you bought an investment property using a conventional mortgage, but wish to negotiate a shorter repayment timeline or better interest rate. Private money lenders can help you refinance, thus significantly lowering the associated costs.
- Buying a new property – Investors can also use private money to buy new investment properties – condos, multifamily homes, single-family homes or apartments. The key to acquiring such loans is to craft the right pitch and run the numbers using a reliable real estate investment calculator (here’s a great one). If you are a first-time investor, talk about the potential profitability. Experienced investors can show evidence of successful real estate deals in the past.
5. Hard Money Lenders
Hard money lenders are semi-institutionalized lenders that are licensed to offer loans. This alternative source of funding has become very popular with real estate investors all over the world. Most hard money lenders will ask for between 12-15% in interest, as well as a one-time, upfront fee to process the loan. Unlike banks where it could take months before funds are released, hard money lenders provide investors with almost instant access to money.
Hard money loans are especially useful for:
- A real estate investor doing a gut rehab
- Investors doing a quick property flip
- People that cannot access traditional mortgages because of poor credit scores
- First-time real estate investors
6. Wholesaling Real Estate
When it comes to how to raise capital for real estate, wholesaling is a commonly overlooked strategy. Though not traditionally considered a source of funding, wholesaling is a practice that has helped savvy real estate investors get funding quickly. When executed well, investors can make money within hours from a wholesale deal without spending their own money.
In this strategy, the real estate investor (wholesaler) contracts a property with a seller, looks for a potential buyer interested in buying it, and then assigns the contract to them. The idea is to sell the property to an interested buyer before the contract with the homeowner lapses. The wholesaler makes money by selling the property at a price higher than the initial amount quoted by the seller. Profits earned can then be used as capital for real estate deals.
Since real estate investors don’t actually buy the investment property, wholesaling is not as risky as flipping. Flipping involves costs such as insurance, property taxes, and mortgage. The capital required for wholesaling is also much less than that needed for flipping.
Related: Real Estate Wholesaling: What You Need to Know
Raising capital for real estate deals is not as difficult as many people imagine. The most important thing when learning how to raise capital for real estate is to know what lenders want and give it to them. This will greatly enhance your chances of securing the financing that you require for investment property.
Through the article DienAnh24h.Net hope you will understand more about How to raise money for real estate investments best edited by DienAnh24h.Net