Raising money to finance a new development is often one of the biggest hurdles real estate developers face. Knowing how to get investors for real estate development will help you expand your real estate business, giving you a chance to build more properties, and grow your net worth.
In this article, we’ll show you multiple ways to leverage other people’s money to fund your real estate developments!
Understanding the Importance of Funding in Real Estate
Real estate funding isn’t just about scraping together enough money to finish a structure. It’s about finding enoughfunding to bring your vision to life. And it’s about leveraging debt and equity strategically to provide the best results for both the project itself and for all the people involved in the deal.
Debt vs. Equity Funding
All capital raises for real estate fall into one of two categories: debt or equity.
Debt funding is when investors act as lenders to a real estate development. Investors loan the developer the money needed at a pre-determined interest rate. A mortgage loan from a bank, for example, would be debt funding. The developer would repay this loan with the agreed-upon interest, on a set schedule.
Equity funding is when real estate investors share ownership of the development. Investors, in this case, buy into a real estate project and own a stake in the property. In many cases, equity investors are entitled to a share in the profits from the sale of the development (or a share of the ongoing rental income if the asset is intended to be held long-term), rather than receiving a pre-determined interest rate.
If, for example, you were to invest in a real estate deal with your business partner, you would each be an equity investor in the project.
Learn more about debt vs equity investing in real estate.
7 Sources of Funding for Real Estate Development
Here are seven sources for you to consider tapping for funding your next real estate development.
1. Traditional Mortgage and Construction Bank Loans
Mortgage loans can be used to purchase a property, and construction loans can be used to renovate the existing structure or build on the property. These debt-based funds offer comparatively low interest rates, but they can be difficult to secure because these institutional investors are somewhat risk-averse.
For small residential developments, mortgage and construction loans might suffice. Just be prepared to jump through a few hoops to prove your creditworthiness.
2. Home Equity Loans and HELOCs
Home equity loans and home equity lines of credit (HELOCs) both allow property owners to convert a portion of their home equity into cash-in-hand, which can then be applied toward your new development project. This type of debt funding is best for those who have a lot of equity in a property that they are willing to put on the line for the success of the new development.
It’s important to note that failure to repay a home equity loan or HELOC can result in the foreclosure of the collateral property. So, for example, if you take a home equity loan against your home to finance a new project, and the project does not perform as needed to repay the loan, the bank could potentially seize your home.
3. Hard-Money Loans
Hard money loans are issued by private money lenders (individuals or companies rather than institutions like banks) based on the value of the collateral, rather than the creditworthiness of the borrower. While banks would prefer the stability of on-time loan payments from a borrower, hard money lenders would not mind foreclosing on the property used as collateral to add the property to their own portfolio. So hard money lenders are willing to take more risks than traditional banks, making this an option for those who don’t qualify for traditional bank loans.
Hard money loans are typically used as short-term “bridge” loans. If, for example, you are planning a single-family flip with an ADU (accessory dwelling unit) addition, you could potentially take out a 12-month bridge loan to fund the construction and repay the loan balance upon the sale of the completed flip.
It is worth noting that interest rates can be extremely high on hard-money loans. And there is a risk of losing the property if the loan cannot be repaid.
4. Private Equity Funds
Similar to hedge funds, private equity funds are pooled investment vehicles in which multiple investors pool their investment capital to fund a portfolio of investments. Unlike the debt-based funding we have discussed to this point, private equity investors focus on equity-based investment opportunities. They look to own a share in the projects and earn a performance-based return.
Private equity funding is all about networking. These investments are “private,” meaning that they are not offered to the general public. Getting your real estate developments offered to private equity investors most likely requires a relationship with a private equity fund manager.
5. Peer-to-Peer Loans
Peer-to-peer loans are similar to private equity funds, in that they are both pooled investment vehicles in which multiple investors pool their funds to finance a portfolio of investments. But, unlike private equity funds, peer-to-peer lending is available to the general public. This allows developers to more easily reach a larger group of potential investors. Also unlike private equity, peer-to-peer loans are debt-based rather than equity-based.
Peer-to-peer loans (often simply referred to as P2P) are typically facilitated with an online platform. Different platforms have different requirements for the types of investment opportunities that can be promoted on the platform. So you may need to shop around.
6. Self-Directed Retirement Accounts
With self-directed retirement accounts, investors can invest in real estate with a 401k or IRA. This gives investors the additional incentive of having their real estate profits grow tax-deferred in their retirement accounts. Unfortunately, many investors don’t realize that this is an option, so real estate developers need to educate investors on the benefits of self-directed retirement accounts in addition to convincing them to invest in a specific development project.
The upside is that investors may be more inclined to continually invest in your new projects. After all, they can’t access their retirement account holdings until they hit retirement age. So as long as your projects perform well, they have no reason not to reinvest in each new development.
7. Real Estate Crowdfunding and Syndication
Real estate syndication and crowdfunding are very closely-related investment vehicles that allow multiple investors to pool their funds to invest in specific real estate projects. Unlike private equity funds, crowdfunding and syndication are both available to the general public (although some projects may be available only to accredited investors). And, unlike peer-to-peer loans, crowdfunding and syndication can offer both debt and equity options.
Furthermore, crowdfunding and syndication can allow investors to choose investments deal-by-deal, rather than investing in a “whole fund” of properties. This deal-by-deal investing is typically preferred by developers because it allows individual projects to stand on their own merit instead of being lumped in with a portfolio of other properties.
Why Crowdfunding and Syndication Investments Are Becoming More Popular
Crowdfunding and syndication are among the most modern methods of raising capital for real estate. These models have been matching developers with investors since the JOBS Act changed real estate in 2012.
Here are a few reasons why crowdfunding and syndication continue to grow in popularity among investors and developers:
- The ease of investing. Syndication makes real estate investing as easy as stock market investing. This attracts more investors that developers can potentially work with.
- Investor services. Syndication companies can manage the investors, providing updates, fielding questions, and disbursing proceeds on behalf of the developer.
- Administrative management. The syndication sponsor can form the ownership entity for the investors, providing a stable legal structure for all parties involved.
- Bulk-deal negotiating power. Syndication companies complete multiple developments each year, giving them greater leverage in negotiating better terms on traditional financing as well as labor and materials.
- The potential for quick, favorable funding. As partners in a deal, syndication companies might even front the capital needed, then backfill the funding as investor contributions come in.
When Should Developers Consider Getting an Investing Partner?
Real estate crowding and syndication companies can do more for developers than simply help them raise capital from investors. These real estate companies can serve as valuable investing partners for experienced developers.
Is an investment partner a good option for you? Here are three signs that you’re ready to get an investing partner:
- When you want to leverage resources. In addition to helping developers raise money for real estate projects, syndication companies have other resources available, including innovative software solutions that can reduce overhead expenses and increase profitability.
- When you want to outsource certain tasks. Take investor relations for example. Many developers prefer to focus on construction rather than investor relations. With a syndicate partner, you can effectively outsource investor relations!
- When you need local insight and expertise. An established syndication company has an experienced team of local real estate analysts and an extensive network of local industry contacts that could prove invaluable to a developer.
Partner with Gatsby Investment
Are you ready to partner with a real estate syndication company that can help you raise funder for your next development while managing investors on your behalf? Consider partnering with Gatsby Investment.
Here at Gatsby, we have a 100% success rate; we’ve never lost money on a deal. In fact, we’re so confident in our real estate investment model that we don’t charge any upfront fees. We simply share in the profits, so if the project isn’t profitable, we don’t get paid.
Leverage our experience, network, and proven track record for the success of your next development. Learn more about joining Gatsby in a sponsor partnership today!