One of the hardest phases in developing a property is to raise funds for real estate projects. Unfunded projects will incur additional expenses due to delays. The sooner the project gets started, the sooner the return on investments becomes available.
There are a number of ways to raise funds for real estate projects. Some options include private equity, debt financing, and crowdfunding.
Raising Funds for Real Estate Projects through Private Equity
Private Equity funding is a method of financing that involves the use of funds pooled from private investors rather than the traditional method such as through the banks or institutional lenders. Typically, a real estate company will have to contact a private equity fund general partner (GP), also known as a sponsor, to apply for funding. After submission of the required documents and satisfying other requirements, the sponsor will offer the project to the Limited Partners (LP) and passive investors for funding. The real estate company will subject itself to further Private Equity Fund compliance and make sure that it delivers the investment expectations.
Financing Real Estate Developments with Debt Instruments
If a company is looking to raise funds for its real estate projects without giving up equity, it may choose to finance it with debt. This option allows the company to remain in majority control of the company while raising funds from investors who receive interest payments in return.
There are three major forms of debt financing:
Syndicated Debt
This is a form of loan where the real estate company borrows from a single lender who sells portions of the loan to a group of investors. These loans provide faster processing but have a higher interest rate. Borrowers declined by a bank typically receive offers for syndicated loans.
Direct Debt
This is when a real estate company gets funding by directly borrowing from an investor or group of investors. In exchange, they are offered a fixed interest rate for a specific period.
Bank Loan
This is a traditional form of debt financing provided by banks. To get approval, a real estate company must meet strict guidelines and complete the required documents. It may be tedious, but it helps the real estate company structure its business plan to be profitable enough to pay its obligations.
Crowdfunding
Crowdfunding is a method for raising funds for real estate projects as well as other businesses and start-ups. The JOBS ACT of 2008 enabled small businesses and startups to access funds through crowdfunding.
Crowdfunding portals such as EquityDoor offer its platform to real estate businesses to raise their needed capital. It is an interesting option for investors who do not want to be hassled with complexities. Moreover, crowdfunding allows smaller investors to pool their money together making investments more affordable for them.
Capital Stack
This simply means a layer of capital funded through various means such as bank loans, crowdfunding, private equity, etc. Capital stack is more of organizing funding sources into seniority when it comes to interests and dividend payments.
