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How To Raise Money For Real Estate Investing: The Ultimate Guide

Raise Money For Real Estate Investing

As with any large financial undertaking, real estate investing involves a lot of processes. In order to do it right and become the most profitable you can be, you need all your ducks in a row, so to speak. The first step is knowing how to raise money for your real estate investments. Once everyone is on board and set up properly, raising money will come easy!

The first thing people often forget about raising money is that deals take time to close - sometimes a significant amount of time. Before you even start thinking about the actual money, it might be smart to line up some deals that are almost ready or already pre-approved so that you don’t end up just asking around when the time comes.

It's also important to remember early on that the deals themselves will be your money makers. You should never put yourself in a position to sell your deals so hard that you are giving away equity. After all, this is your way out of the rat race.

With all this in mind, here are some of the most common ways experienced investors raise cash to invest in real estate:

Bank Loans

When trying to fund your real estate investment, bank loans can be a very good place to start. The interest rates are relatively reasonable, which makes it a favorable option if you’re looking around.

Despite this appeal, you have to be aware that there’s a catch to this option.

Banks typically require a certain percentage as a down payment on the property, often around 20% or above. They will also check your debt-to-income ratio, as well as your credit score. Trying to make a down payment big enough to make a real estate purchase, such as when you want to buy an apartment complex, can be difficult. But worry not, there are other options!

Real Estate Crowdfunding Sites

Real estate crowdfunding has grown tremendously in the past decade. The number of websites and projects related to property investing has multiplied dramatically. There are now several options available for individuals who want to invest in real estate, but don't have the down payment or credit score required by most banks and other traditional lenders.

Real estate crowdfunding sites also remove much of the legwork associated with borrowing money. As long as you agree with their investment strategy beforehand, they'll handle everything. From looking at potential properties to collecting rent payments. However, if you don't like an investor's decisions, tough luck—you're stuck with them!

Federal Housing Administration Loans

Another common way to borrow money is through a Federal Housing Administration (FHA) loan. In fact, if you don't have a 20% down payment saved up for a traditional mortgage, many lenders will require that you obtain one in order to borrow money. The biggest reason that investors seek these loans is that they allow for up to 3.5% down payments. They also only require the borrower to pay a monthly mortgage insurance premium of around 0.85%.

That means there's no private mortgage insurance, which ends up saving borrowers thousands of dollars per year. You'll still need a credit score of at least 580 and debt-to-income ratio of no more than 43% to qualify for an FHA loan. But, if you can manage these requirements, this type of loan is your best option by far. It was made specifically for low to medium income earners who want to invest in real estate.

real estate investment

Self-Directed IRA Accounts

A self-directed IRA account is an IRA that you set up and personally contribute to rather than one that the bank or brokerage firm manages for you. It's also an excellent way to raise money for real estate projects. Using this type of account allows you to use the money inside your retirement fund(s) as collateral on loans. Thus, any gains from your investments are tax-deferred until they're withdrawn. This can make the return on investment (ROI) on your funds even greater.

Hard Money Estate

A hard money loan is a loan in which the borrower uses either real estate or other collateral, such as equipment or inventory, to secure the loan that he or she then pays back with interest. These loans can be used for nearly any purpose. However, most often they're taken out when investors need to quickly raise large amounts of money for real estate. They also typically have lower credit requirements than bank loans.

Hard money lenders don't just accept anyone as a borrower. Thus you should prepare to provide them with detailed information about your credit and financial status. You may also need to provide these for the property you plan to purchase as well.

Private Money Loans  

A private money loan is a loan that's either secured or unsecured and underwritten by an investor rather than a bank. This makes it easier for borrowers to obtain funds because these lenders focus on their potential ROI above all else.

This type of funding can be great option when you want the funds ASAP but the terms of a traditional bank mortgage prevent it from matching your needs. Privately placed loans allow you to raise money for real estate relatively quickly without having to wait for a lengthy underwriting process.

Peer-To-Peer (P2P) Loans 

There's a growing trend in the world of financing known as peer-to-peer lending. This allows borrowers to obtain unsecured loans for real estate or other purposes. You obtain these from lenders who are willing to provide funding without verifying your credit history, income, or existing debts.

P2P loans work by creating an online marketplace where interested lenders can list their requirements. Then borrowers can search for money that meets their needs. Once the borrower applies for the funds, they're either approved or rejected by the different investors on the site. Some sites even allow new loan requests every day.

Wholesale 

A wholesale property is property that is purchased at a discounted price with the intent of immediately flipping it for a profit. This means you'll need to have equity in your properties or be able to show proof of funds in order to secure funding. The more cash you can put down, the more leverage you'll have on the property. Any money left over after the purchase becomes pure profit.

Wholesale deals are risky because they're often sold "as-is," but if you know how to do your due diligence ahead of time then they can provide high returns for minimal effort. If you want to take advantage of this strategy, you'll need to have ample cash working capital and the ability to move quickly.

Conclusion

Real estate investors are likely familiar with most of these strategies, but hopefully, this article has given you a new perspective on traditional lending. Not to mention introducing you to some unconventional sources of funding that you can use to help grow your portfolio.

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