7 Ways to Raise Capital When You’re Without Funds
Not all investors have money to invest. Yet, they offer other skill sets or values that make them an important part of the team. That being the case, finding the deal and closing on the deal can be miles apart if you can’t raise the money. Below are multiple avenues to raise capital for that perfect deal without any funds to get it to the finish line.
1. Mortgage or Investment Property Loan
With a good banking relationship, a good deal will always be attractive to a bank for a mortgage. The property type and deal will determine which mortgage is appropriate, e.g., FHA or conventional, or in the case of a rehab project, a 203(k) loan. Bankers usually have a multitude of lending vehicles in their arsenal to help you get that deal completed. Bear in mind that banks will want to see that you have some skin in the game, so be prepared to put down a larger down payment, have sufficient cash reserves, and have good credit scores to help ease you through the underwriting process with the bank.
2 . Private Money Lenders
Family, friends, colleagues, business people, or anyone flush with cash are also good options for anyone looking to stay away from the banks. Typically, such loans are documented through a promissory note and a personal guaranty from the borrower. The private lender will generally ask for interest payments or some sort of return on their investment. The interest on these loans typically is higher than that offered from a bank, and the terms of the loans are often for shorter periods of time — typically a few years or less. Such loans are a good solution to the bureaucratic trappings of underwriters.
A word of caution: Have your lawyer review any documents provided to you by the lender prior to signing the promissory note and attendant documents.
3. Hard Money Lenders
Hard money lenders are well known for financing fix-and-flips. These loans are for a shorter period of time, typically have higher rates of interest, and most often require a percentage of the profits from the sale of the property. I like to consider these loans as short-term solutions to financing problems. Due to the high interest and loss of profit to the lender on the sale of the property, these can be less helpful for projects with tight margins.
Crowdfunding sourcing is a relatively new money-raising avenue. Yet it works, and at times, it works well. Simply explained, the project is put on a crowdfunding site such as Fund that Flip or GROUNDFLOOR, and those that contribute own a portion of the project and attendant profits. Please perform your due diligence on any crowdfunding platform to raise capital.
5. P2P Lending
Similar to crowdfunding, this method to raise capital requires you to post your project on a website, where you will be matched with an investor. Such peer-to-peer investing has seen good success on platforms like PeerStreet. Read the fine print for terms and make sure to perform your due diligence into the reviews, terms, and security of the platform.
6. Home Equity
Home equity is a great way to turn your personal residence into a bank. By tapping into the equity of your personal residence you can quickly purchase a property, make necessary fixes, and flip the property. Moreover, the equity in your house can be quickly repaid with a refinance once the property is secured. Speak with your attorney and CPA or accountant about home equity. This method has proven itself a viable option time and again and is readily accessible to most people.
Once you have all the tools to acquire the deal and have it planned out, the right partner can bring the money to the table. That being said, it is vital to vet that person thoroughly. Ask for their references, get to know them, and find out if they have ever done this type of transaction before. More often than not, partnerships grow and succeed faster than those trying to go it alone. Real estate meetups and networking opportunities are great synergistic points to find your next partner.
Remember, getting to where you want to be in the real estate investing world is a long game. Play it smart, take the long view, and do your homework. If there is a deal to be made, there is always a way to execute that deal. We all bring certain value adds to the table — money is simply one of those value adds. Think outside the box and make the deal happen.
Best of luck to you out there.
About the Author:
Brian T. Boyd, JD, LLM, www.BoydLegal.co
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.