Real estate investing, like any big financial project, necessitates a lot of procedures. To accomplish it correctly and be the most successful you can, you'll need all of your ducks in a row. Knowing how to raise capital for your real estate investments is the first step. Raising money will be simple once everyone is on board and set up correctly.
The first thing that many individuals forget when attempting to raise money is that deals take time to complete – frequently a significant amount of time. Before you get started thinking about the cash, it's a good idea to line up some prospects that are almost ready or already pre-approved so you don't have to just ask around when the moment comes.
With this in mind, here are some of the most common ways experienced investors use to raise money to invest in real estate:
1. Bank Loans
Bank loans can be a wonderful place to start when trying to raise cash for your real estate project. The interest rates are reasonable, making them an appealing option if you're looking around.
Despite this, you should be aware that there is a hitch with this choice.
Banks usually demand a down payment of at least 20% on the property, although this number may vary. They'll also look at your debt-to-income ratio and credit score.
It might be tough to come up with a significant down payment for a real estate purchase, such as buying an apartment complex or fix and flip properties. But don't worry; there are alternative solutions!
2. Real Estate Crowdfunding Sites
In recent years, real estate crowdfunding has exploded for both accredited investors and nonaccredited investors. The number of websites and property investment projects has expanded dramatically.
There are several alternative methods for individuals to invest in real estate without having the down payment or credit score required by most banks and other traditional lenders.
Another benefit of real estate crowdfunding sites is that they take care of a large percentage of the legwork involved in borrowing money. They'll manage everything as long as you agree to their investment strategy ahead of time.
From inspecting houses to collecting rent payments, it's all part of the process. However, if you don't agree with an investor's decisions, there's not much you can do about it!
Here are some of the most popular real estate investing apps:
Fundrise
Fundrise is a wonderful real estate crowdsourcing site for non-accredited investors. And it’s especially true if you’re a first-time investor seeking to get your feet wet. This is because, as a new investor, Fundrise has various options with very high returns on investment.
For example, Fundrise offers eREITs and eFunds, which are electronic REITs and electronic funds. Commercial property is the goal of eREITs, with the aim of generating income for you (and it does a great job of it).
Fundrise is a nice inexpensive alternative for those who are searching for a low-cost, automated platform that offers REITs and other modest real estate investment vehicles.
Fundrise might be the ideal choice for you if you’re looking for a low-cost, automated platform that offers REITs and other cheap real estate investments.
The minimum investment amount for getting started with Fundrise is $10, and the management fee is 1% of your invested capital. Quarterly dividends are paid on income-producing funds.
Make your money work for you with Fundrise! Start real estate investing with just $10—no need for big bucks to get in. Fundrise gives you access to funds built to grow your money steadily. It’s easy, affordable, and designed for your goals. Want to let your cash hustle for you? Fundrise has you covered.
DiversyFund
At DiversyFund, they make it easy to buy shares in a portfolio of fully vetted, multifamily real estate.
With the click of a button, you could own a piece of a real estate investment trust (REIT), across multiple properties, just like Fundrise.
DiversyFund provides only one type of investment: The Growth REIT. This real estate investment trust focuses on offering investors income by investing in residential apartment buildings.
Unlike other crowdfunding platforms, DiversyFund invests in commercial properties and owns them outright. This saves the investor from hefty commission fees that come with other crowdfunding sites.
Investing with DiversyFund is a great alternative to Fundrise. You can get started with just $500 and your small investments can reap big returns. All dividends are reinvested in properties so you don’t have to worry about withdrawing gains until your property sells.
Investors don’t have the option of selling their investments and must wait until the company liquidates to make a profit. The investment term may be at least five years in duration.
DiversyFund opens opportunities for the everyday investor to access high value private real estate investing through its non-traded REIT (real estate investment trust).
3. Federal Housing Administration (FHA) Loans
A Federal Housing Administration (FHA) loan is another popular option for borrowing money. In fact, many lenders will need you to have a 20% down payment ready for a conventional mortgage if you don't already have one.
The most compelling reason for investors to take out these loans is that they allow for down payments of up to 3.5%. They also only require the borrower to pay a monthly mortgage insurance premium of around 0.85%.
There are no private mortgage insurance premiums, so borrowers save hundreds every year. To be eligible for an FHA loan, you'll need a credit score of at least 580 and a debt-to-income ratio of less than 43 percent.
However, if you can meet these criteria, this form of loan is by far the finest alternative for you. It was created especially for low- to moderate-income individuals who wish to invest in real estate.
4. Self-Directed IRA Accounts
There are so many different types of IRAs. But one IRA that you set up and contribute to yourself rather than one in which the bank or broker manages for you is known as a self-directed IRA account. It's also an excellent method to generate raise money for real estate ventures.
Using a custodial IRA may allow you to obtain a loan based on the money inside your retirement funds. As a result, any gains from your investments are tax-deferred until they're taken out. This can improve the return on investment (ROI) on your funds considerably.
5. Hard Money Estate
A hard money loan is a loan secured by real estate or other assets, such as equipment or inventory, and repaid with interest.
Investors use real estate loans to raise cash for various purposes, including commercial real estate purchases. However, the most common reason that investors take out real estate loans is to access quick funding for commercial property acquisitions. They also typically need less credit history than bank loans.
A mortgage with a hard money lender is not something that just anybody can obtain. As a result, you should be prepared to provide them with comprehensive information about your credit and financial history. If you're interested in getting a hard money loan, you can discover the best hard money lenders we've reviewed.
6. Private Money Loans
A private money loan is different than a bank loan is one that is secured or unsecured and underwritten by an investor rather than a bank. Because these lenders are more concerned with their potential return on investment, borrowers will find them easier to get funding from.
When you need cash right now, but your traditional bank mortgage terms don't meet your needs, this sort of financing may be ideal. Privately funded real estate loans allow you to obtain money for properties more quickly by skipping the underwriting procedure.
There are two types of private money loans. They include unsecured loans and secured loans. Unsecured lenders don't require any collateral, so they often lend thousands to smaller investors.
Our pick for the best private lender is Groundfloor. The Groundfloor platform is two-sided and includes borrowers in addition to investors. For those borrowers, Groundfloor is the only direct lender offering retail investor capital for short term residential real estate loans.
This means that Groundfloor borrowers get access to more flexible and cheaper capital than a traditional bank or a hard-money lender.
The good thing about Groundfloor is that no experience is required to be eligible for a loan. Rates start at 5.5% and roll points into closing and loan sizes are from $75,000 to $1.5M.
My favorite thing about Groundfloor is the true deferred payments, meaning no payments until loan repays.
Plus you can get up to 100% loan-to-cost, depending on your experience and up to 75% loan-to-after repair value.
You'll need a minimum credit score of 600 and the property value must be at least $50,000 with 9, 12, and 18 month terms.
- Loan sizes from $75,000 to $1.5M
- Nine, 12, and 18 month terms
- No minimum transactions experience required
- Minimum credit score of 600
7. Peer-To-Peer (P2P) Loans
There's a new way to borrow money in the world of finance called peer-to-peer lending. This enables borrowers to get unsecured loans for property or other purposes. You obtain these from lenders who are willing to offer cash without assessing your credit history, income, or existing obligations.
P2P loans are another sort of peer-to-peer lending that allows individuals to borrow money directly from other investors. The process begins with an online marketplace where lenders might list their criteria. Then borrowers can look for financing that fits their needs. The different investors on the site either approve or refuse applications for funding once they've been submitted by the lenders.
8. Wholesale
Wholesale properties are real estate that has been purchased at a reduced market price with the intention of flipping it for profit as soon as possible. This implies you'll need equity in your properties or evidence of funding to get a loan.
The more money you put down, the more power you'll have over the property. Any funds remaining following the purchase are pure profit.
Wholesale purchases are a high-risk, high-reward affair since they're frequently sold “as is,” but if you prepare ahead of time and do your homework correctly, they may provide excellent returns with little effort. If you wish to implement this approach, you'll need enough cash working capital and the capacity to move swiftly.
Conclusion
The majority of these methods have probably been used by real estate investors before, but hopefully, this post has given you a fresh perspective on conventional lending. Not to mention introducing you to some non-traditional funding options that may be useful in building your real estate portfolio.
