Looking to invest money in real estate?
A real estate investment is an effective way to generate passive income, optimize retirement planning, and attain financial freedom. Like most other investments, you will need to put in the capital to purchase a home before you can start making money. While using your own savings or borrowing from family or friends are options, most investors rely on bank loans, private money lenders, and other sources.
While raising capital for your real estate investment can seem like an uphill task if you are new to the business, it is not all that difficult. The most important factor to remember when raising capital for your real estate investment is to understand the different types of loans available, what lenders are looking for, and how to convince them.
Here are the six steps to securing the capital for your real estate investment business.
Six Steps to Raising Capital for your Real Estate Investment
#1: Know the different types of financing
Before you make the decision to invest money in real estate, it is important to know what types of financing are available and which one matches your investment goals.
Bank mortgages are loans that the real estate investor borrows to purchase a home or other types of real estate. The loan is paid back over time, with regular payments. The property purchased is the collateral for securing the loan. Mortgages are available at different rates including fixed and adjustable rates. Fixed rates remain the same throughout the payment term while adjustable rates can change periodically.
Mortgage rates depend on the term of the loan, the amount of money borrowed, and the lender’s interest rates. The most common fixed-rate mortgage terms are 30 and 15 years. The term, for some mortgages, can be shorter (for instance, five years) while others can extend up to 40 years or more. Stretching the payment term reduces your monthly payment while increasing the total amount you pay back to the lender.
Adjustable rates are those that have a fixed interest for a specified initial duration after which the rates vary periodically. Typically, there are caps or limits to how much the rates can vary every time the interest is adjusted.
FHA Investment Loan
If you are looking for loans with lower eligibility requirements, the FHA (Federal Housing Administration) loan may be an ideal option. Lenders offer better terms as the loans are FHA-insured and you can apply for the loan regardless of your income level.
FHA loans are also typically given to owner-occupied properties. To invest money in real estate, you can leverage the FHA loan to purchase a multi-family property and reside in one of the units while renting the others. After the time period set by the mortgage lender, you can move out of the multifamily property and rent all the units.
The maximum loan given with an FHA loan is $356,362 but can go up to $822,375 in regions where property prices are higher.
Private Money Lenders
Private money lenders are not associated with any financial institution and are looking to invest in viable ventures. The key to convincing private money lenders is to ensure your pitch is right and the numbers you project are accurate. Here’s where undergoing training on the real estate investment business from experienced investors can be invaluable.
#2: Clear your debts and ensure a good credit score
Banks assess multiple factors before approving the loan including
- Your debt to income ratio
- credit history
- Bank statements
- tax returns
To qualify for FHA loans, your FICO score (credit score) should not be below 580. A stable income, a great credit score, and minimal debt are the three factors that can increase your chances of getting the loan.
#3: Arrange the down payment
Most types of loans will require you to make a certain amount of down payment.
For example, for an FHA loan, the down payment can be as low as 3.5 percent. The down payment for other types of loans such as an adjustable-rate mortgage or jumbo loans can vary from 10 to 20 percent.
#4: Promise realistic returns
When it comes to crowdfunding or private money lenders, the primary concern your potential investor has is to protect their investment. Most lenders depend on the collateral to ensure that they don’t lose their money in the worst-case scenario. The best way to raise the capital for a real estate investment is to convince the lenders that it is a reliable investment. Sounding overconfident or promising huge returns will lead to the investors flagging your presentation as a scam or high-risk investment.
Even if you believe your projections are achievable, it is better to underestimate and deliver more later. This will help build trust and credibility with your money partners. For instance, you can initially project an ROI of 6 percent, while they end up making a 12 percent profit with the real estate investment.
Building a personal rapport and relationship with the investor can help you get the best deal. It can be tricky to find like-minded individuals who are looking to invest money in real estate. One of the crucial habits you need to acquire in the real estate investment business is networking. Attend local networking events and real estate seminars to discover a potential investor and let others know what you are looking for.
#6: Get trained in the real estate investment business
Attending specifically designed real estate investment training courses designed by experienced real estate investors is a great way of learning what the business entails, getting the support of like-minded women and proven investors. REIW (Real Estate Investing Women) offers detailed courses in real estate investing for women that include a step-by-step guide to real estate investing, proven techniques from active investors, networking opportunities, and ongoing support.
With all the tools and information you need in the real estate world, you can go on to craft the path of success when it comes to investing money in real estate.
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