One of the things that a real estate investor usually encounters is having a great idea or an investment opportunity but raising funds can be a big issue. Real estate can be a great investment, but it can require significant capital. For some, this isn't a problem, but for others, it can be the only thing standing between them and their dream of becoming a real estate developer.
If you are interested in investing in real estate but don't have enough money to put down a large downpayment, there are still options available to you. The following is a list of various ways to raise funds for your real estate projects:
Raising Funds through Joint Venture
A joint venture is a collaboration with another party or parties who bring money and/or expertise to the table in exchange for—usually—a share of the profits. You form a legal relationship and invest together for profit. One advantage is that you won't need to ask for a large amount of money from a single source. A disadvantage is that it dilutes ownership and profits may be harder to determine, requiring an independent accountant to reconcile the numbers at year's end.
Real Estate Syndication
Real estate syndication is when multiple investors pool their resources to invest in real estate. The general partner manages all aspects of the deal, and all of the investors are limited partners who share in the profits and losses according to their percentage of ownership. While this sounds like a joint venture, there is one key difference: In a syndication, multiple investors contribute capital together, while in a joint venture, it's possible that one person brings all of the capital themselves.
Raising Funds through Real Estate Crowdfunding
The term “crowdfunding” refers to the process of raising capital by soliciting small amounts of money from a large number of people. This can be done through a variety of channels, including online platforms like EquityDoor, which allows real estate companies to raise capital through crowdfunding. When raising money through crowdfunding, it's important to think about how much you need and what you hope to do with the money once it's raised. If you’re interested to know more about crowdfunding, do research, consult, and read articles about crowdfunding.
Loans and Mortgage Services
Loans and mortgage services are an excellent place to start. Rather than trying to pay for a property out of pocket, these companies can help you secure funds by leveraging your current assets or taking out a loan with favorable terms that you can make payments on over time. These companies can also help you secure a mortgage or loans to acquire properties or help fund a real estate development project.
Sell Existing Assets to Raise Capital
Investors can often use the proceeds from a sale of existing assets to increase their capital for other purchases. They do this through 1031 exchanges, which allow them to sell assets without tax implications. They can find properties that are similar enough to the ones they previously owned, and transfer the profits from one purchase to another without having to pay taxes on the income.
There are a lot of rules that come with a 1031 exchange, and it's important investors understand these details before they start the process. If they don't follow all of them perfectly, they will lose their ability to complete the exchange. It can feel like you have to jump through a lot of hoops in order to get everything right, but if you're careful and take your time, you'll be able to minimize your tax burden while increasing your portfolio.
Raising Capital by Borrowing from Family and Friends
One of the most common ways in raising capital for investment properties is through family and friends. You can borrow money from them almost usually interest-free and in flexible payment terms.
There is also a very low chance that they will take legal action against you if you forget to pay them back, which is why it’s a good idea to invest with family and friends. They help you when you need help the most.
The most important thing to remember is that if you decide to borrow money from a family member or friend, make sure that you keep the agreement as formal as possible. This means you should prepare a promissory note or other loan documents detailing all the terms of your agreement. As much as possible, avoid borrowing money from those who cannot afford it because this will only put them in more financial trouble, especially if you are unable to pay back the loan on time.
Borrowing money from family and friends can be tricky because it involves relationships. So make sure that you think about it carefully before doing so.