You’ve heard a lot of talk about real estate as the best place for your investment dollars. Or maybe you’ve just always dreamed about owning property.
A lot of people talk about owning real estate someday. For most, “someday” never comes.
The top reason?
Most dreamers don’t know anything about raising capital for real estate. The next most popular for not becoming an investor is not having enough money.
What’s your reason?
We’ve put together 6 tips for raising real estate capital. Even if you don’t have a stash of cash saved today, these tips can help you save for a downpayment or find other sources for real estate capital.
Don’t let lack of capital hold you back from realizing your investment dreams.
1. Dip Into Your Own Wallet
If you’re new to investing, you may not know how to raise money for real estate investing.
Cash is king, especially when it comes to investing in real estate.
Paying the total cost of an investment property is the dream of most real estate investors. And it’s possible, but usually not until you have some experience under your belt.
For your first investment, if you’re the sole investor, your focus will be on saving enough money for a down payment. Your paycheck is your wealth-building tool at this point.
But wait! Before allocating what’s left over after you meet living expenses, continue reading.
First, eliminate debt with each paycheck. Once you pay down your debt, stash 3-6 months worth of expenses — fast. This is your cushion for repair expenses on your investment property.
Now you can start saving for the down payment.
2. Use the Equity in Your Home
If you own at least 20% of your own home, you may qualify for a home equity loan or a home equity line of credit (HELOC).
For real estate investors, leveraging the equity in your current home may be the most cost-effective option for raising capital. Investors who choose this method of generating investment dollars enjoy some of the lowest consumer lending rates on the market today.
There is a difference between a home equity loan (HEL) and a HELOC.
- Uses the equity of the house as collateral
- Fixed- or adjustable-rate loan
- Five to 30-year repayment
- The borrower pays closing costs
- Revolving credit line based on equity
- Lender sets credit limit
- Borrower draws by writing a check against the line of credit
- Similar to a credit card – when you make payments, available credit increases
- Ten year draw period
- Ten to 20-year loan repayment
- Adjustable interest rate
- Possible fees/closing costs on loan
Before making a decision on either of these home equity products, talk with other experienced investors.
3. Buy a Duplex
Another option for investors who don’t have the cash for that first rental property is purchasing a duplex.
Buying a duplex serves multiple purposes — all of them wins for you.
First, you get your feet wet as a landlord. Second, you build equity for future property investments. Third, if you live in one unit, your tenant’s rent may cover your mortgage, which opens up more of your cash for living expenses and/or savings.
If duplex living isn’t your style, and you already own a home, consider this strategy:
Mortgage a second home and use it as your primary residence. While living in this home, rent out your existing home. This is another way you can invest in another property and use one for rental income.
4. Invite Family and Friends
If you have a supportive network of family and friends, invite them to invest in your real estate project.
Start with a list of people you think may be interested in loaning you money for your venture. Most people have at least 1 or 2 people in their immediate network who are looking for a good investment.
Of course, before you ask for a loan, you’ll do your research and prove to your investors that you know the market. Put together a presentation showing your goals and what value investing in your project brings to your investors.
Maybe you don’t feel comfortable asking friends and family for a loan, though.
If that’s you, then show off your project plan and ask if they know anyone looking for a good investment. Chances are some in your network will invest in you. Those that don’t can get you connected with investors they know.
5. Join an Investment Club
Investment clubs are an interesting option for a real estate investor who has limited cash. Members of investment clubs pool their money and vote on how it gets invested.
Investment clubs don’t recruit members. This protects potential investors from involvement in scams or investment schemes.
Maybe you’re not interested in actually joining a real estate investment club. You may be only looking for money for one property. If so, learn the art of pitching a good investment idea.
The members of real estate investment groups aren’t necessarily in the game to be helpful to new entrepreneurs. They typically only invest in what they consider lucrative deals.
6. Reach Out to Private Lenders
Investors interested in raising capital for real estate also use private lenders.
Private lenders differ from the more casual network of family and friends mentioned above, although you might come across a private lender while networking.
Private money lenders are not financial institutions. They’re not banks or mortgage companies.
You may have heard the term “hard-money” before. Private lenders are often called hard-money lenders. Even though they’re not financial institutions, their business practices are similar.
Private investors will only loan you money if they’re confident you’ll meet the loan terms. Credibility counts for these investors.
If you think using private lenders is something you’re interested in, consider starting with a small loan. Pay the loan on time. Once you prove you’re a good risk, the lender will work with you on bigger loans.
Time to Start Raising Capital for Real Estate
Thanks for sticking with us while we shared tips for success in raising capital for real estate investing. Hopefully, you’ve found a few you helpful ideas for your real estate venture.
Whether you choose using your own cash, equity in another property, or money from other investors, securing capital is the first step to a career in real estate investing.