Raising capital for any business seems a big, daunting task but, it can be done on your own if you really want it. Getting involved with real estate investment is one of the best ways to build wealth. We equate higher investments with higher rewards. Therefore, let us start this journey and let me help you think of options to raise that much-needed capital.
If a business you want to start entails a big investment and what if you could not raise the capital on your own. If there are times that we can’t come up with that large sum of money to invest all on our own, we have to turn to others to make the investment with us.
While this may seem like a detriment, working with others, especially in raising capital to fund an investment can be good for a number of reasons. First, it spreads out the risk. You’re in this together with other partner(s). Thus, if it doesn’t work out, you didn’t put all of your eggs in one basket. Second, you’ll make smarter decisions about your investments. Part of raising capital on your own is persuading your partners to invest with you. Therefore, your investments should be better than good and you have the data to back it up. Lastly, while real estate investing is famous for being a form of passive income, this is not always the case. Sometimes investing takes work like being a landlord or flipping a house. Spreading out the responsibility will alleviate stress on your end.
There are many options when it comes to raising capital on your own. I’ll go through each and educate you on the pros and cons. Is there something I didn’t cover or more questions on the material? Please feel free to share in the comments and I’ll get back to you as soon as I can.
Raise Capital for Any Kind of Investment
You can raise capital for any kind of investment. While certain partners will have certain preferences based on their own knowledge and background, you can find someone to meet your needs no matter the investment. I’ll get into this more later, but by attending networking mixers and getting the word out that you’re looking for partners, professionals in the industry will be sure to know someone who could be a good lead.
Best for Seasoned Investors
Finding interested parties is only half the battle. The second half is proving to investors that you’re the guy or gal to work with. This will be easier to do if you already have a body of work to show them. By showing samples of successful investments you’ve made in the past that have worked out, you’re showing that you have the skills necessary to take the money and give them a return. Of course, the more samples you have the easier it will be to find new partners. Therefore it is more difficult for someone new to the industry to find partners because there is not yet proof that you’re a good partner.
You won’t just need samples of good investments. You’ll also need all the financial information upfront as well as properties in mind. This will involve a ton of upfront research and you’ll have to know what questions to ask realtors or homeowners. Put yourself in the shoes of the investor – what will they need to know to feel right handing over a large sum of money to you?
It will be advantageous for you to have LLC when you are trying to raise capital on your own. This will further legitimize you and show that you’re viewing this as a serious business. You will have to put in time, energy and money upfront to become a LLC, but this will not only make prospective partners more trusting of you, but will also help keep you more organized in regards to separating your investing funds from your own personal finances.
If you are not a seasoned investor and you’re still not sure where to start, read my article about real estate investing with $0.
Where to Find Partners
Now that we’ve gotten that all out of the way we can get into the nitty gritty of where exactly you can find partners.
Banks
The first option is banks. This is used mainly for rentals, as the bank will finance based on the value of the house at the moment of the appraisal. So banks are not a good option if you’re looking to flip or buy land to build from scratch. The home should be renovated or at least in good shape. You’ll need to prove you have the funds to sustain the mortgage on the rental house. Another option is to go with a business partner to the bank, that way you can prove you have the funds as a partnership and will take away some of the pressure of funding the mortgage by yourself.
Hard Money Lenders
I wrote about working with hard money lenders in this article. In summary, hard money lenders can be used for flips or rentals. For rentals, you buy it using hard money then refinance with bank or mortgage company for the long term. For flips, hard money lenders work out great, as they focus on the value after the renovation. However, they sometimes need to have 6 months or more of funds to sustain payments or funds to cover a portion of the renovation before they release the repair funds from escrow.
Hard money lenders also expect points when paying them back and have higher interest rates because they tend to be individuals and thus when they lend there is more risk. Again, you can learn more about them here.
Raise Capital By Working with Friends & Family
Before you think of approaching friends or family for a partnership, there’s much to consider in raising capital on your own with the help of a family or relative. First, know that money matters can tear loved ones apart. But if you feel you have someone who you think would be interested, there are a few things you can do.
First, ask for a specific amount of money for a specific aspect of the investment. For example, this will go towards the roof being fixed in this fixer upper, or this will go towards the marketing fund of my rental property. This will make them feel like they know where their money is going and you’ll come off as organized and trustworthy.
Second, you should write a formal agreement even if it is not a formal relationship. This will legitimize the deal. There are plenty of promissory note templates on the internet. You can keep it simple.
Lastly, only ask for an amount of money you know that they can afford. You don’t want to put anyone out. You don’t want to create a rift. Best case scenario is reaching out to friends and family that you know are already investors.
Networking/Private Money Lenders
Attend mixers and meet-ups for those interested in real estate investment. These individuals love real estate and some don’t want to deal with all of the work – finding the property, hiring contractors, etc. So, they lend money and make a profit out of the interest and points, just like a hard money lender. The way they are different is because these individuals use their IRA. In Houston we have Quest IRA. That’s where we raised the money for our business. Or, like hard money lenders, they use their savings or disposable income.
The most important thing, no matter the lender, is building a trusting relationship with the individual and then they will lend based on the value of the property and could be trusted when it comes to raising capital for your business. I like working with them because as you build a relationship, they can fund a purchase in hours if needed!
There’s also the option to network online. It need not all be in person, although it definitely helps to create trust by at least having a phone call or a Skype session. I talk more about networking with other real state investors here.
Early Partnerships Could Help Raise Capital
If all of this sounds very much out of your comfort zone, it may be a sign that it’s time to team up with someone from the get-go. If you’re more introverted it can be advantageous to partner with someone who loves people and loves selling. Or, if you’re someone who is good at selling but not good at putting together data and financial information, team up with someone who is. These are the some of the best ways to raise capital on your own.
Again, overall, partnerships are helpful in real estate investing and raising capital for your business. It’s a lot of work and a lot of responsibility but getting the funding on your own could be done. It is nice to have someone to lean on when times get tough or busy. Plus, if you want results fast, more manpower behind your projects will speed up the process.