Steve Byrne is founder of EquiSource and has been in commercial real estate investment, management, and finance for nearly 40 years.
Reliable, profitable and widely available, real estate is an excellent investment choice. The benefits of real estate investments, from tax incentives to reliable rental income, are clear.
You may be concerned about how to raise capital for real estate investments, but it’s easier than you think. There are many ways of securing capital, and you can find one that will work for you in this article.
How Do I Generate Capital For Real Estate?
As a real estate investor, you want capital sources with a proven track record. There are six options that investors tend to use:
• Bank loans
• FHA loans
• Self-directed IRA accounts
• Hard and private money loans
• Peer-to-peer (P2P) loans
1. Bank Loans
These are some of the most popular approaches to funding a real estate project. With today’s low interest rates and strong real estate market, this traditional option continues to be appealing.
There is some red tape associated with getting a loan through a bank. Your lender will evaluate your debt-to-income ratio, credit history and assets before agreeing to offer you a loan. To get approved for a loan, you will need a strong credit score, a reliable income and minimal debt.
2. FHA Loans
These loans are insured by the Federal Housing Administration. Because FHA loans were designed to help low- and middle-income borrowers qualify for financing, they have lower qualification requirements than other loan types. Down payments may be as low as 3.5% and credit scores as low as 580.
While FHA loans do offer benefits, they are intended for owner-occupied properties. For an investor, this means purchasing a multi-family home and occupying a unit on the property. The other units can then be rented to generate income.
If you are looking for a home and an investment opportunity all-in-one, an FHA loan is a great choice.
3. Self-Directed IRA Accounts
You can use your retirement savings to invest in the real estate market with a self-directed IRA account. While traditional IRA custodians limit you to the assets they sell, a self-directed IRA custodian acts only as an administrator. As the IRA’s owner, you determine how the money is invested. Within certain limitations, the IRS allows investment in real estate without an early withdrawal penalty.
Profits made through this form of real estate investment return to the IRA account, where they can continue their tax-deferred growth. If you plan to use your real estate business to fund your retirement, this is a great way to obtain investment capital.
4. Hard And Private Money Loans
Hard and private money lenders both offer similar opportunities for raising money for real estate. Hard money lenders are professional lenders licensed to offer loans. Private money lenders are private individuals with money to invest. These lenders generally place a higher value on collateral than credit scores, making them a good option if your credit score needs work. However, as these are high-risk loans, they are also associated with higher interest rates.
One of the advantages of these lenders is speed. While banks can take a month or more, a hard money lender may complete the transaction in 10 days or less. With the combination of speed and higher interest rates, you may find this option ideal for a property you plan to rehab or flip.
5. Peer-To-Peer (P2P) Loans
P2P loans are a growing trend in the real estate business. With a P2P loan, you can raise money for real estate from other investors. These loans operate through online marketplaces that connect you with potential investors. Because there are several marketplaces and investors, you can shop around for the loan that is right for you.
P2P loans are made by individuals, so the interest rates and terms vary. Often, interest rates are lower than those of conventional banks. There is also significantly less red tape involved in a P2P loan, though you can expect a credit check.
This is both a way to generate capital and a form of real estate investment that does not require you to spend your own money. In short, the investor acts as an intermediary, connecting a seller to a buyer.
To raise money through wholesaling, you must first identify a property selling at an excellent rate. Generally, this means looking for a fixer-upper. After putting the property under contract, you then flip the contract to your buyer at an increased price. Your earnings are the difference between the seller’s price and your price.
Is It Easier To Raise Capital For Commercial Or Residential?
Both commercial and residential real estate have their advantages. Commercial real estate offers higher profit margins and diverse revenue streams. On the other hand, residential real estate is more stable, without the potentially dramatic fluctuations of the commercial market.
Because it is seen as the more stable option, it is easier to raise capital for residential real estate. Commercial real estate is generally more expensive. It requires more complex financing and more capital upfront.
How Do I Raise Capital Quickly?
Raising capital for real estate can be time-consuming. If speed is important, focus on methods that offer a quick turnaround:
• Private money loans
• Hard money loans
• Peer-to-peer loans
Getting started investing in real estate can feel like a challenge. You will need to determine your investment strategy, choose your first real estate deal and raise capital. If that final step still seems intimidating, you can start by reaching out to your network, checking your credit score and determining the option that works best for you.
With some research, a clear plan and a solid understanding of the market, raising capital for real estate will be your first step toward a lucrative investment journey.
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