4 Sources of Capital for Your Real Estate Business
4 Sources of Capital for Your Real Estate Business
Real estate investing offers investors a unique way to leverage other people’s money to earn a respectable return. Unfortunately, too many people are discouraged by the amount of money required to get started. The good news is that there are many lenders who are willing to supply the seed money you need.
It is important to evaluate the pros and cons of each type of funding resource before moving forward. Higher risk loans cost more and must be factored into the profitability equation. As always, lenders are seeking to maximize their interest returns based on perceived risk versus profits. As an investor, you must also weigh the risk/benefit factors before accepting a loan.
Below are some sources of capital to consider for business real estate.
1.Hard Money Loans
Hard money loans provide an excellent funding source for a new real estate investor to get started. Since the loan approval status depends on the value of the asset or projected value of the asset after renovations, it takes some of the pressure off of the borrower’s ability to secure a loan based on credit and income credentials.
Hard money lenders base their lending decisions primarily on the value of the asset. Investors interested in buying properties, fixing them up, then selling them are prime candidates for this type of loan.
These short-term loans charge fees and relatively high-interest rates. While the interest rates might initially seem less than optimal, when investors consider how fast they can get their hands on the money and the short period of time they will pay interest on the loan, these costs can be justified and factored into the deal as necessary costs.
Another benefit of hard money lenders is that they will provide you with a prequalification letter quickly so you are in a position to compete in a bidding situation. That benefit is significant for inexperienced investors without a large bank account balance as they begin to invest.
While a borrower’s credit standing does not typically prevent loan approval, a borrower’s credit rating and real estate experience does play a role in the interest rate charged. For beginners, this fact can be a small price to pay for the chance to become a real estate investor.
2.Business Line of Credit
A business line of credit is highly recommended for any investor seeking to compete in the world of business real estate where having funds readily available can make the difference between being able to compete and missing out on profitable opportunities.
While this type of business loan is not as easy to get as hard money, it is still relatively easy to obtain after you’ve been in business for a year or longer. Your credit score is also a factor. Depending on the lender, credit score requirements can differ widely.
One of best features of a line of credit is that you only pay interest on the amount you borrow. Much like a credit card, your business has a credit limit that is available to be used as needed. Once established, your business can borrow as much as you need on an ongoing basis as long as you don’t exceed the credit limit.
Obtaining a business line of credit is an excellent way to establish business credit. As an unsecured loan in most cases, you won’t be required to collateralize this loan. That frees up your assets for other purposes.
3.Real Estate Crowdfunding
Crowdfunding is another possible source of capital for real estate investors. This type of lending leverages the power of the internet and media platforms such as Facebook, LinkedIn, and Twitter to advertise your investment offer. Your success in raising money is largely dependent on your ability to promote the value of what you have to offer to interested parties.
While there are examples of great success stories in crowdfunding, most real estate investors who need money find this route to be uncertain and time-consuming. Another downside of crowdfunding is that you are often expected to give up some ownership in your business in exchange for the capital provided.
4.Friends and Family
This list would not be complete without considering the tried and true resource represented by family and friends. Unfortunately, this source of capital is not available to everyone for a multitude of reasons. However, for those lucky enough to be in a position to tap into this type of resource, this can be an inexpensive and viable way to get the money you need to launch a career in real estate investment.
The most important thing to remember is that this is a business deal and that the paperwork needs to be completed and signed by all relevant parties. Having everything in writing is extremely important when working with friends and family members. Nothing could be worse than a misunderstanding that might jeopardize an important relationship.
Due to the possible downside of borrowing money from people you know and care about, many real estate investors decide to look elsewhere for capital. With many other options available, there is no reason to go this route unless you are extremely comfortable that there will be no negative fallout.