Estimated reading time: 8 minutes
Securing funding can feel like the most challenging part of turning a real estate vision into reality. Whether you’re eyeing your first rental property or a multimillion-dollar commercial project, finding the right capital could be the key to unlocking your investment potential.
In this article, we’ll walk you through the various strategies for raising capital for real estate, from traditional loans to creative financing techniques, equity partnerships, and more.
Before diving into the process of raising capital for real estate, it’s crucial to have a clear understanding of how much funding you’ll need and what it will cover.
The type of property you plan to invest in—whether residential, commercial, or distressed—will significantly impact your capital requirements. Residential properties, for example, often have lower purchase prices and renovation costs compared to commercial properties, which may require extensive upgrades or specialized equipment. Distressed properties might offer lower purchase prices but often come with higher repair costs.
Start by outlining all the one-time expenses associated with acquiring the property, including purchase price, closing costs, and any renovation costs. Having a realistic estimate of these costs will give you a target number to aim for when raising capital.
Don’t forget to include recurring expenses in your calculations. These can include property taxes, maintenance and repairs, and management fees. For rental properties, also factor in potential vacancies and unexpected costs to ensure you have a cushion for lean periods.
A pro forma is a document that projects your income, expenses, and expected returns over time, helping you evaluate the viability of your investment. It can also serve as a powerful tool to present to lenders or investors, showcasing your understanding of the property’s financial potential and your ability to manage it effectively.
There are two primary types of investment capital: debt and equity.
Debt capital refers to funds borrowed from lenders such as banks, credit unions, or private hard money lenders. This form of capital often requires regular interest payments and repayment of the principal within a set timeframe.
Maria wants to purchase a multi-family apartment complex for $1.5 million as an investment property. She has $500,000 in her savings but needs $1 million to complete the purchase.
So, Maria approaches a bank and applies for a commercial real estate loan. After reviewing her credit score, income, and the property’s projected cash flow, the bank approves her for an 80% loan-to-value (LTV) loan. They loan her $1 million at an interest rate of 6% paid back each month over 20 years.
Maria provides the $500,000 from her savings as the down payment, and the bank holds a lien on the property, which serves as collateral for the loan.
Maria retains 100% ownership of the property and uses rental income from the apartment complex to cover the loan payments and generate a profit. However, if the rental income does not meet expectations, Maria is still responsible for repaying the loan.
Equity capital involves raising funds by selling partial ownership of the investment to partners or private investors. Instead of making interest payments, the investor shares a portion of the profits with equity contributors.
John identifies a distressed commercial building priced at $2 million, with plans to renovate it and lease the space to businesses. The total cost, including renovations, comes to $2.5 million, but John only has $1 million in personal funds.
To raise the remaining $1.5 million, John pitches the opportunity to private investors. He offers them a 60% equity stake in the property in exchange for their investment. The investors are attracted by the potential returns from both lease income and the property’s increased value after renovation.
John establishes an LLC, where he retains 40% ownership, and the investors collectively hold 60% ownership. Profits are shared proportionally—John receives 40%, and the investors split 60%.
With the $1.5 million secured, John successfully completes the purchase and renovation. By partnering with investors, he avoids taking on debt or making loan payments, allowing him to maintain healthier cash flow for managing the property.
Private money refers to funds raised from individuals or non-institutional sources, often offering more flexible terms than traditional lenders. These funds can be critical for real estate investors who need quick access to capital or face challenges securing conventional financing. Here are some of the top sources of private money for raising capital:
Venture capital may be your best option if you’re seeking large funding amounts for ambitious projects or need professional oversight and resources. However, these firms often demand some control over project decisions and aggressive profit-sharing.
Independent individuals or small firms specializing in lending money for real estate investments. This can offer more flexible terms compared to traditional banks, though they often require collateral or higher interest rates.
Online platforms like Fundrise or RealtyMogul allow investors to raise funds from multiple contributors. This can provide access to a wide range of potential investors, though you’ll need a strong pitch and marketing strategy. In addition, fees and platform regulations may cut into profits.
Here’s a daunting statistic—there is currently over $42 trillion in retirement accounts. The vast majority of this capital is locked up in stocks, bonds, and mutual funds. However, some savvy investors have turned to self-directed IRAs (SDIRAs) to diversify their retirement portfolios.
SDIRAs open the door to a much wider range of assets—including real estate. In fact, real estate is one of the most popular asset classes among Entrust clients, many of whom are actively seeking their next investment opportunity.
If you’re looking to raise capital for your real estate offering, engaging SDIRA investors could be the perfect solution.
Want to learn more? Connect with one of our SDIRA experts today to see how this unique investor pool may help you achieve your capital-raising goals.
When raising capital for real estate investments, building trust and credibility is essential.
A well-crafted business plan is your first opportunity to demonstrate professionalism and expertise. Your plan should highlight potential ROI, using realistic projections to show how investors could benefit from the deal.
It should include a market analysis with data-driven insights on the property’s location, local real estate trends, and demand indicators. Finally, it should address potential challenges, such as market downturns or unexpected costs, and explain your plan to manage them.
Investors often back people they know, like, and trust. Expand your network by attending real estate meetups and events. Participate in real estate forums, LinkedIn groups, or platforms like BiggerPockets to engage with potential investors and showcase your knowledge.
If you’ve had past successes in real estate or a related field, highlight them. Your track record can serve as proof of your ability to execute successful deals. Consider sharing case studies or examples of profitable investments you’ve managed.
If you’re new to real estate but have expertise in project management, finance, or construction, emphasize how those skills could translate to investment success.
Raising capital for real estate investments can be a transformative step in your investing journey, but it’s not without potential pitfalls.
While using debt to fund real estate deals can amplify returns, overleveraging can put your entire investment portfolio at risk. High levels of debt can lead to cash flow issues, especially if the property doesn’t generate income as expected. Always have a financial cushion to cover unexpected expenses, such as repairs or market fluctuations.
Due diligence isn’t just for investors — it’s also for investment sponsors.
Remember to thoroughly vet potential investors, ensuring they align with your vision and are reputable sources of capital. Don’t underestimate the importance of thorough property assessments to identify potential risks and costs.
In an effort to secure funding, some investors may exaggerate the potential ROI.
Disappointed investors may not only withdraw support but also damage your reputation in the industry. Overpromising returns can lead to accusations of misleading investors, potentially resulting in legal complications. Focus on providing realistic and data-backed projections to set accurate expectations and maintain trust.
If you’re ready to expand your reach and connect with thousands of potential investors, consider Entrust Connect—our exclusive online investment marketplace for over 24,000 Entrust clients.
Here’s how it works:
When an Entrust client expresses interest in your offering, they can access your investment documents, ask questions to learn more about the opportunity, and seamlessly fund the investment through our platform.
This streamlined process not only simplifies the investment journey for our clients but also reduces the burden on you when raising capital via retirement accounts.
Have questions or want to learn more about how Entrust Connect can support your investment goals? Speak with one of our SDIRA experts to see if it’s the right fit for your opportunity.
Note: The content provided here is for informational purposes only and should not be considered financial, tax, or investment advice. Always consult with a trusted tax or financial advisor to determine what is best for your unique situation.