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How to raise capital for real estate investments

by Corben Grant on 18 Mar 2022

It's no secret that getting into real estate is easiest when you have a good amount of starting capital. While you can start real estate investing with little money, the more capital you have to start, the more options are available to you and the larger returns you can find.

Obviously, with the high prices of real estate, most people don't simply have the cash on hand to buy homes outright. This is evidenced by the number of homebuyers who choose to use a mortgage loan, for example. One of the keys to growing wealth through real estate investments is raising money to get started.

Real estate investing with other people's money

Ultimately, though you need starting capital to invest in real estate, it doesn't necessarily have to be your own money. There are many ways to raise investment capital for real estate, and if done right, you can even invest without any money of your own.

Now, naturally, this money isn’t simply free and will have to be paid back eventually, but the benefit of leveraging borrowed money now is that you can get into the market much sooner, which can have many benefits for investors.

While you could simply save on your own, this can take much longer, and in the meantime, you aren't able to grow your money. By utilizing borrowed money, you can pay it off gradually while enjoying the investment returns of your real estate assets.

Borrowed money can also open up more expensive investment opportunities that would otherwise be out of reach.

The downside is that whoever provides you with starting capital will expect something in return, usually either interest paid on the loan or a portion of the investment's returns. This will cut into your net returns, so you should always carefully consider your options before reaching an agreement.

The question then is: how do you convince people to fork over their hard-earned cash for you to use? Well, it may not be as hard as you think. In this article, we will go over some of the options available to investors to raise money for real estate projects.

Options for raising capital for real estate investments

Traditional mortgage loan

Mortgages are extremely popular in real estate and that is no surprise. There are dozens of financial institutions offering mortgage financing in Canada to help homebuyers cover up to 95% of a home purchase.

Because of the popularity of these loans, there is not only tons of variety available to borrowers, but there is also tough competition for the big players to offer the best deals. However, since they are so popular, mortgage lenders are also able to be pretty selective about who they lend to and you won't be able to get the best rates without a significant down payment and high credit score.

Overall, this option is great for someone just looking to buy a home in the most simple way possible. Investors, depending on their business plan, may not be as appealing to mortgage lenders and may find it better to look elsewhere for money.

Private money lenders and hard money lenders

Private money lenders can lend money much in the same way that mortgage lenders do, but with some key differences.

The main thing to know is that mortgages are much more regulated and can have more strict qualifying rules. The benefit of private money loans is that you don't necessarily need to jump through the hoops of mortgage lenders to raise money for your real estate project. This can mean a lot more flexibility to a borrower at the cost of loan terms that can be less favourable. This option is great for established investors who are confident in their ability and want more flexibility for their real estate deals.

A hard money loan tends to be issued by an organization, while a private money lender is more of a general term and can even include friends, family members, or a wealthy peer.

Invest with a partner

If you know a like-minded investor who may be interested in working with you, you can form an investment partnership. With this strategy, you can double your buying power and you gain a valuable second party who can offer their own insights and skills.

Unlike with a loan, your partner will have more say in the way the project is handled, so it’s best to work with someone with whom you see eye to eye. Finding a trustworthy partner will be crucial to the success of your project.

Real estate crowdfunding

In a crowdfunding scheme, a real estate investor identifies an investment opportunity that requires a large amount of capital. This investor then presents the opportunity to other investors to add their money to the fund, to benefit from a portion of the returns.

This style of real estate deal allows the investor in charge to have a large amount of control over the project and who they work with, but it can require a lot of work to track down all of the interested investors. This is also a good option for projects requiring a very large amount of capital as it may be easy to get multiple smaller contributions than a single large one.

Home equity loan

If you already own a property, especially if you own it outright, and it has increased in value since the purchase, you may be able to leverage existing equity for an additional property. Either through a mortgage refinance or a home equity line of credit, financial institutions will be willing to lend you up to a large percentage of the value of your home.

This can offer you fast and secure access to a large amount of money. You will have to pay back your equity loan, however, these loans tend to have some of the best interest rates.

In addition, if you use your equity to fund an additional property, you allow your money to grow in two streams of equity rather than just one, which can easily more than makeup for the interest paid.

 

Should I invest with other people's money?

Ultimately the viability of your investment when borrowing money is going to depend on the terms you reach with your lender and the returns you expect to get on your investment. However, raising capital for real estate is a proven method that many investors have used to great effect.

The benefits are numerous, most importantly offering you access to a much larger portfolio, and the opportunity to work with other experienced investors. The downsides are a potential increase in complexity when trying to acquire funding and a need to share some of your returns.

The benefits are numerous, most importantly offering you access to a much larger portfolio, and the opportunity to work with other experienced investors. The downsides are a potential increase in complexity when trying to acquire funding and a need to share some of your returns.



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