Investing in real estate has become one of the most sought-after ways for capital multiplication, and it’s for good reasons. Whether you’re investing for retirement or basically to secure a safer future, real estate is your best bet to achieve financial freedom.
Private equity real estate refers to real estate owned by private companies and individuals. It involves acquiring, financing, and owning properties through an investment fund. Generally, private equity real estate is not listed on a public exchange.
As in every other investment vehicle, raising capital gives you a point of entry in private equity real estate investments. In most cases, institutional and retail investors pool resources to raise money to secure contracts for single-family or multifamily properties or pay contractors.
However, there are a few vital ways to raise capital that many investors tend to overlook. In this article, we’re going to look at these methods and help you in raising private capital for your next real estate investment project.
Let’s kick things off.
1. Real Estate Syndications
Real estate syndication could be your best option if you’ve tapped all your resources and have hit a wall.
What Is Meant by Real Estate Syndication?
Syndications refer to partnerships where several investors combine their resources to invest in and manage a property. Syndications are involved in pooling money to invest in real estate.
This kind of arrangement is beneficial as investors bring different skills and experiences to the table.
A real estate syndication is structured with two types of investors; The general partner members who are referred to as the syndicator or the sponsor, and limited partners who are passive investors.
As a syndicator, you scout for property or real estate projects worth investing in and raise funds for them. You are also involved in the property’s day-to-day management. In other words, you provide sweat equity.
On the other hand, investors simply fund the project. They provide financial equity.
Sponsors are responsible for raising between 5% and 20% of the total capital. The investors can then chip in on the deficit.
A few years back, only wealthy investors were able to join syndications since most of them invested in multi-million commercial real estate projects. However, real estate crowdfunding has changed the game.
Real estate crowdfunding makes it easier for investors to raise funds through social media and other crowdfunding platforms. Crowdfunding taps in the power of numbers.
Real estate syndications are organized investor groups while crowdfunding refers to the process of finding these investors. Don’t get the two mixed up.
Syndication Advantages
Real estate syndications have many benefits for the sponsors. They include:
- Access to bigger investment opportunities: While investing alone, you might be limited to only investing in projects within a certain category. When you launch your own real estate campaign, you’ll gain access to bigger commercial real estate projects. Syndications are also often the first to know when some projects are coming to the market. You can capitalize on this, launch your campaign, and invest in the property before others get to know about it.
- Tap into other investors’ skills and experience: In any syndicate, you’ll have investors who’ve been in the game for many years and have cultivated advanced skills through experience. As a sponsor who might have not been in the game for long, you might also not know how to evaluate and underwrite hundreds of potential investments. Once you launch your public syndication campaign, you bring in seasoned investors on board. They’ll show you how to fund real estate deals, what makes a great investment opportunity, and the kind of pitfalls to look out for.
- Access to financing options: Syndications tend to gain more access to financing options that are cheaper and more favorable. When you approach a financial institution by yourself, your credit score or financial transaction records might lower your financing limit. Your syndication, on the other hand, could be transacting millions of dollars every year, which is a great advantage when seeking financing.
Perhaps quite obviously, as a sponsor, you won’t have to entirely fund the investment. You’ll crowdfund the equity from other limited partners.
Syndication Disadvantages
No good thing comes without any downsides.
The main downside of real estate syndications is the hassle that comes with managing the day-to-day management and operations of the investment.
As we’ve mentioned before, the sponsor in any syndication is required to provide the sweat equity. Unless you’re ready to deal with contractors, handle aggrieved tenants or liaise with a property management agency, then becoming a syndicator may not be favorable for you.
Another downside may be that you have to pay the profits among the syndication. In most cases, profits are split on a 70/30 basis, where the sponsor takes 30% while 70% is split among the passive investors.
It’s not like investing in a rental property as the sole owner when you get 100% of the returns.
How to Start a Real Estate Syndication Campaign
If you’ve seen great potential real estate investments, or want to find some opportunities, but you’re running low on cash, you can invest as part of a syndicate.
Basically, there are two ways to start a real estate syndication campaign:
Join an Existing Public Deal Syndication Platform
Joining an existing syndication platform to get investors is one way to raise money as a sponsor. Many online syndication platforms have become big players in the real estate investment scene.
You can use these platforms to gain much-needed access to a larger pool of willing investors to fund your syndicate.
However, these platforms have one major disadvantage; they have high barrier entry. They may only be favorable to experienced syndicators. This leads us to the next way to start a syndication campaign:
Launch a Public Syndication Campaign on Your Own
If you’re a new sponsor and public syndication platforms are not that much of an option, you could choose to launch your own real estate syndication campaign.
However, remember you’re getting investors away from established and trusted platforms. This means you must make your investors trust you and feel safe putting money in your syndication. How do you do this?
Pick whatever type of income property is best suited to invest in your market. Learn how to scout for property, analyze deals and carry out due diligence. You want to be confident enough to convince your investors about a deal’s feasibility and profitability.
Once you’ve identified the best type of income property to invest in, come up with an investment strategy that compliments your investment goals.
Now it’s time to put together a professional team. Your investors will trust you more when you work with professionals in the real estate industry. Your team should include real estate agents and brokers, real estate and syndication attorneys, property managers, and lender or mortgage brokers.
When it comes to getting investors, first consider bringing a successful investor on board. This is a person with a wealth of experience and can help you talk to investors, clients, and contractors. Primarily, you want someone who can become your mentor and also show you where to get money.
After that, you can make a list of people you know might be interested in investing. Your goal is to convince them to put money into your project. Arrange meetings with these people and pitch to them how much money they should expect to make monthly, yearly, and once the property is sold.
You can also get innovative and advertise your syndication project through social media, and emails.
Now come up with another list of all the people who’ve agreed to invest in your syndication. You can then update them on the progress of your investment.
Most importantly, don’t forget to involve a legal consultant. They’ll come in handy when registering your syndication and advise you on other legal aspects. You don’t want to run into legal trouble in the future.
2. Real Estate Partnerships
“Teamwork is the ability to work together towards a common vision. The ability to direct individual accomplishment towards organizational objectives. It is the fuel that allows common people to attain uncommon results.”- Andrew Carnegie
If you look at successful real estate investors, many have gotten there due to the power of collaboration. You can access bigger and better deals with partnerships.
Real estate partnerships are formed by two or more investors who bring together their capital, resources, and skills to buy, develop and manage real estate property. This strategy capitalizes on the strength of two or more investors in a single property.
One of the most common forms of real estate partnerships you must have heard of is real estate limited partnerships (RELP).
In real estate partnerships, it’s common to find arrangements where one member takes over the majority of the responsibility. Often, this happens in exchange for a larger share of the profits. Other investors become passive or limited partners.
When it comes to taxation, real estate partnerships undergo the same tax structure as individually owned real estate businesses.
Here are the advantages and disadvantages of real estate partnerships:
| Advantages | Disadvantages |
| ● The right partners bring a lot of resources, such as capital or even the right connections.
● When distributing profits and losses, real estate partnerships offer flexibility. ● Partners put their heads together and offer different perspectives when analyzing a potential investment. ● Partners’ combined portfolios can give them better access to financing options. ● Partnerships allow partners to equally divide responsibilities and other tasks involved. |
● Profits must be split among the partners. This undermines each partners’ earnings.
● If investors within the partnerships have different management styles, it may lead to conflict. ● There may be issues splitting responsibilities if there’s no binding agreement. ● Friendships could be ruined due to conflicts in the partnerships. ● If one partner brings more to the table than the rest, there could be issues in equity and sharing of responsibilities. |
The best way to avoid or mitigate conflicts is to have some form of binding or formal agreement before you get into the partnership. Always remember that a successful real estate partnership isn’t formed overnight. It takes time to nurture and develop.
Always weigh the benefits and drawbacks before getting in one. Choose what works for you.
3. Peer-to-Peer (P2P) Loans
As a real estate investor, you might have already heard of P2P lending. It’s also known as crowdlending or social lending.
Peer-to-peer lending is a way to borrow money that allows investors or businesses in need of financing to directly access capital from other businesses or individuals. These types of loans are suitable for people looking to steer clear of traditional financing types with strict requirements and conditions.
Investors and real estate businesses can use P2P lending to gain funding for real estate projects, such as house flipping or commercial real estate development.
Essentially, you can use P2P lending for projects that are usually harder to get lending from traditional institutions because of the level of risks involved. Remember that you’re going directly to other investors.
P2P loans work in almost the same way as crowdfunding, but with P2P loans you have to pay back.
P2P lending is done through platforms where you post your project seeking funding. You’re matched with an investor who lends you the capital you’re looking for. You have to pay back the money, plus interest.
Advantages of P2P Loans
The main advantage of P2P lending is that it makes accessibility to funding easier. The application process is also easier as you simply have to fill an application and provide identification. Some platforms may need you to provide proof of employment or income.
P2P loans also close quicker, have lower interest rates, and are more flexible compared to other loans.
Disadvantages of P2P Loans
As for the downsides, P2P loans tend to be riskier. Be careful not to exploit the accessibility of funds and borrow more than you can afford. Don’t compromise your financial security and credit score simply because you can access a lot of money.
Always read and understand the fine print well before you apply for a P2P loan. Terms and conditions vary between platforms. Some may be a bit exorbitant.
Also, review the platform’s data security and listen to what other investors have to say.
4. Hard Money Loans
A hard money loan is a loan that is backed by a “hard” asset, such as real estate. They are also referred to as bridge loans and are secured by real property.
Hard money loans are given by individuals or businesses, and not traditional lenders. As such, the borrower’s creditworthiness is not that much of a factor.
What matters is the value of the property you’re using as collateral. Lenders look at the property’s value itself and decide whether to finance your project based on that.
These loans are most suitable for investors who want to flip houses or develop a property to sell to make a profit.
Hard Money Loans Advantages
There are a few good reasons why you should forgo conventional financing options in favor of hard money loans. Their benefits include:
- Flexibility: Hard money loans are offered by individuals and companies. This makes it easier to negotiate favorable terms and conditions. You can have your repayment terms tailor-made to suit your needs. Other costs, such as processing fees, can also be waived.
- Convenience: Traditional loans take a long time, sometimes even months, to get approval. This can be a huge risk for investors as some partners can pull out of the deal or the property sold off to another buyer. With hard money loans, approval takes a matter of weeks. Time is of the essence, especially in large-scale development projects.
- Collateral: Hard money loans allow you to use the property you’re buying or investing in as collateral. In some cases, however, the lender may allow you to use other personal assets such as other property you own or a retirement account.
Hard loan lenders don’t pay a lot of attention to the repayment because they know there’s a possibility of selling the property themselves if you default.
Hard Money Loans Disadvantages
Hard money loans aren’t perfect. They have two major drawbacks:
- Cost: As the borrower, you have a price to pay for convenience. Interest rates can go up to 10% higher than traditional loans. Other costs, such as the origination fee, closing costs, and loan-servicing fees can drive the costs even higher.
- Shorter repayment time: Hard money loans are mainly created to have the borrower sell their property as fast as possible. This means they have shorter repayment periods than other loans.
Before securing a hard money loan, ensure that you know how long it could take you to sell the property. This will ensure you pay the loan on time without defaulting.
5. Private Money Loans
As the name suggests, a private money loan is funding that doesn’t come from a lending institution or bank. The loan depends on the kind of relationship you have with the lender.
Let’s look at how to raise private money for real estate projects.
You can get a private money loan from your family, friends, colleagues, business associates, or acquaintances of all sorts. However, this is not necessarily always the case. You can obtain a private money loan from a company such as a private equity fund.
In most cases, you’ll repay the loan in interest. However, the lender can also agree to an equity split, or both repayment and equity split.
Since this type of funding is private, it’s up to you and the lender to agree on favorable terms that suit you both.
Advantages of Private Money Loans
What are the benefits of private money loans? The biggest advantage is that you get a lot of flexibility in loan terms and approval requirements.
Private money loans also tend to favor investors who’ve been locked out of traditional loans. For example, you might have a bad credit score, but you can secure a private money loan if your real estate investing experience is remarkable.
Disadvantages of Private Money Loans
As for the downsides, the biggest risk for the borrower is that interest rates may be a bit too high. You might get a better deal if you also qualify for conventional loans.
Also always make sure that your investment is not long-term. Private lenders usually want their money back in a short period.
Rules For Raising Real Estate Capital
As most of these methods involve various parties, many factors are involved when raising real estate capital. You don’t want to encounter legal issues after you’ve raised the capital or for the project to fail due to internal wrangles.
Here are a few rules that a serious investor should follow when raising real estate capital:
- Always seek professional advice: All the ways we’ve discussed above involve various legalities and tax implications. Always consult your CPA and attorney to understand which structure is best for you and what the law will require from you.
- Focus on important relationships first: Needless to say, some friendships and family relations can easily get compromised if anything in the deal goes awry. People will also invest their money in people they know well. Focus on genuine relationships and stay authentic.
- Your mentality is crucial: The right mentality will always come in handy when raising capital for a real estate project. How will you approach potential investors if you think negatively about the project or you’re uncomfortable pitching it? Understand that it’s hard to scale your portfolio without involving third parties. Get your mind right and stay positive.
- Think long-term and see and wide: Too many new investors think that they have to start from the bottom and scale slowly. While there could be some truth in it, it doesn’t have to always be the case. Some investors have taken up multi-million projects in their first real estate deal and succeeded. Be passionate about the game and have the courage to raise capital for projects that are much larger than what you’ve accomplished before.
- Be patient: Patience is very instrumental when raising capital for real estate investments. Building genuine relationships and a track record that investors can trust doesn’t happen overnight. Your investment is bound for failure if you’re looking to raise money from new relationships in a couple of weeks. Be patient when laying a foundation to raise capital.
Also, we can’t stress enough the need to separate your emotions from the deal. Don’t take rejection personally. Far too many investors give up after their first few rejections.
Understand that not everyone will see the vision in you and that has nothing to do with you or your skills. They probably want their capital returned faster or prefer other investment options. Don’t let rejection get to you when you’re raising equity.
Key Takeaways
Real estate investing is one of the surest ways to preserve and grow your capital. Whether you’re investing to become an active property owner or a passive investor, it’s a sure way to gain financial freedom.
Luckily, getting equity capital for flipping houses, commercial property development, or multi-family property investing has never been easier. Many funding options will provide you with the capital you need for your project, even while you don’t qualify for conventional loans.
Real estate syndications, partnerships, P2P loans, hard money loans, and private money loans are some of the ways to raise capital for private equity real estate investment.
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