Real estate investing can be a profitable game, but to enjoy those benefits, you need capital first. Capital is what gets your foot in the door. It lets you buy that run-down foreclosure, invest in that duplex or multifamily property, or pay your contractors on your latest fix-and-flip. Put simply: You can’t be a real estate investor without it.
Fortunately, raising capital for real estate isn’t as hard as it might seem -- even for new investors. Are you looking to drum up investment capital for your first (or next) project? Try these seven strategies on for size.
1. A mortgage or investment property loan.
There’s a number of mortgage loans you might consider to fund your next real estate project. Depending on what type of property you’re buying, you could use an FHA or conventional loan, or if you’re rehabbing the home, a 203k loan could work, too.
Many lenders also offer investment-specific loan programs. These often come with higher cash reserve, down payment, and credit score requirements, though.
2. A private money lender.
You don’t have to go through a bank or established lender to finance your project. Getting a loan from a friend, family member, colleague, or a cash-flush acquaintance or business professional is also an option. In most cases, you’ll need to pay interest or promise the private lender some sort of return on their investment.
The upside? There’s no red tape or difficult qualifying process, and you can probably get your cash pretty fast. Just make sure it’s not your long-term solution. A private lender usually wants their cash back within a few years.
3. A hard money lender.
Hard money lenders are another private financing option, and they also come with less stringent qualifying standards than typical mortgage loans and financing products. The catch, though? They also come with much higher interest rates.
Because of this, a hard money loan is best suited to fast jobs like fix-and-flips or as bridge financing between buying a property and securing a longer-term loan.
You’ve probably donated to a GoFundMe or KickStarter campaign before. Well, real estate crowdfunding is a similar tactic. You pitch your project on a crowdfunding platform, and interested investors can contribute to your efforts as they see fit. In exchange, they own a portion of the project (and its profits).
Some common crowdfunding platforms include Fund that Flip and Groundfloor.
5. P2P lending.
P2P lending (peer-to-peer) is another similar method, except it functions more like a loan than crowdfunded deals do. You post your project on a P2P lending platform, and you get matched with an investor. That investor then lends you the funds you need, and you’ll pay it back — plus interest, over time. PeerStreet is a popular P2P lending platform.
Terms vary wildly on P2P loans, so make sure you read the fine print before going this route. You should also look into the platform’s data security, as well as reviews from other investors. As with traditional mortgage lenders and banks, not all fundraising tools are created equal.
6. Home equity products.
This one’s only an option if you already own a property or two. If that’s the case, you can tap the equity of your existing property via a home equity loan or home equity line of credit (HELOC) and use the cash to fund your next real estate investment or the costs to rehab it.
A cash-out refinance works similarly. You’d just refinance the mortgage on an existing property, take out a higher-balance loan, and put the difference toward your new project.
7. Partnering up.
Have part of the capital you need but not the full amount? Consider finding a partner. You each put up part of the funds and invest in the project together. It solves the capital issue, plus it gives you someone to share the work with.
Just make sure you’re extra careful in vetting the person. They need to be committed to the project (and have the bandwidth to take it on), and ideally, their expertise and knowledge should complement yours. You also might want to bring in an attorney to help structure your deal. This will ensure you’re both clear on how future profits (or losses) will be handled.
The bottom line
Few investors have all the cash they need right off the bat. Fortunately, raising capital for real estate investments is easier than it seems. Need more help getting your next real estate deal or investment opportunity off the ground? This financing guide can help.