If you’re interested in throwing your hat into the real estate investment ring, you’ll need some capital to get started. Generally, when you’re first starting out in real estate investment (whether it be residential or commercial), you’ll want to start relatively small. Still, buying a property as an investor often means placing a large down payment—so it’s not uncommon to need thousands or even tens of thousands of dollars to get going.
If you don’t exactly have that kind of money lying around, you may need to raise capital for your first real estate investment. By having a better understanding of how California hard money lenders work and what they’re looking for in an investment, as well as how to convince a money partner to lend to you, you’ll have an easier time getting your start in the real estate game.
Why You Need Investment Capital
Most investment properties will require a minimum of a 20% down payment, regardless of whether you’re looking at a fixer-upper residential home or a commercial property. In some cases, you may even be expected to pay for a property in-full at the time of purchase (though this is most common with auctions).
With this in mind, it’s a lot easier to see why being able to raise investment capital is so important. Specifically, investment capital refers to the money that you’ll borrow and use to pay for your real estate investment. This can include not only the price associated with purchasing the property itself, but any expenses that may go into updating it and/or renovating it as well.
When you’re trying to determine how much investment capital you’ll need, then, there are a few things to keep in mind. In addition to the list price on the property itself, you’ll also need to factor in closing costs and other expenses that go into closing on a residential or commercial property. This can include title fees, inspection costs, and appraisals as well. In many transactions, this can easily add up to thousands of dollars.
If your investment property will need work, you’ll also need to do a fair amount of research to figure out an approximate figure for your renovations and remodeling. When you add all these costs together (and subtract any money you may be bringing to the table personally), you’ll be able to figure out how much investment capital you need to raise.
Using debt investment capital as opposed to equity capital is where most new real estate investors start out; this means you’ll most likely be turning to banks and other hard money lenders in California to secure the money you need. The banks or individuals you end up receiving funding from are known as money partners. Keep in mind that depending on the size of your proposed investment, it’s not entirely uncommon to work with multiple money partners on a given deal.
Tips for Raising Money as a New Investor
Getting into the real estate investment game can be challenging. Some lenders may not want to work with you because you don’t have experience—but how are you supposed to gain experience if nobody will lend you money? The key is knowing what today’s money partners are looking for in a sound real estate investment and being able to deliver that to them.
As you prepare to approach California hard money lenders, there are a few tips worth keeping in mind that may increase your chances of being able to secure that first investment.
Use Some of Your Own Funds
While this may not be a realistic option for all beginning investors, it’s always a good idea to have a little of your own cash in the game. Doing so will force you to put more thought into where that money is being spent. It will also encourage you to be a little more careful about your spending. This is especially true if you’ll be doing any major renovations or other projects; taking the time to shop around for competing bids and estimates may save you a decent chunk of change.
Your investors may also like knowing that you’re using some of your own capital on any given project. This shows them that you’re confident enough in your plans to put your own money on the line, which can in-turn boost their confidence in your investment.
And of course, there’s always the fact that putting some of your own money into your investment reduces the total amount that you need to borrow. This can make it easier to raise funds while also cutting down on interest payments down the road. The key is deciding on the right amount of your own money to kick in; you don’t want to completely drain your savings account for your first real estate investment, but having at least a small amount of your own money brought in can make a big difference in a lot of ways.
Reach Out to Your Connections
Ask anybody who has been in the real estate game for a while and they’ll tell you that being able to secure funding for your real estate ventures is all about networking. Before you even begin reaching out to hard money lenders, take some time to think about investors you may know personally. If you have any existing relationships with lenders, you may have an easier time securing funding. Even if you don’t know any investors personally, talking to one of your connections could send you in the right direction of somebody who may be interested in funding your project.
Another solid tip to keep in mind when it comes to meeting new potential investors is to find out when local real estate clubs are holding meetings and attend those meetings in our area. These events not only provide a great opportunity to meet some new investors and network with others in the world of real estate investing—but they sometimes offer free training courses as well.
Be Realistic About Returns
At the end of the day, it doesn’t matter if you’re working with a private lender (such as a California hard money lender) or a personal connection. There’s one thing that everybody wants when they lend you money for a real estate investment: returns. When somebody lends you money for a residential or commercial real estate investment, they’re trusting you to protect their capital and deliver on the return that you promised.
With this in mind, it’s important to be realistic about what you can and cannot deliver. Calculating returns, especially when you’re first getting started in the real estate investment game, can be a challenge. It’s always better to air on the side of being cautious with your promises to investors than to over-promise and under-deliver. From there, if you end up delivering more than what you promised, all that’s going to do is create a stronger bond and sense of trust between you and the investor for potential future projects.
If you’re not feeling totally confident about crunching the numbers for your first real estate investment, there are plenty of free resourcesthat can be useful.
Build Your Reputation
Hard money lenders will be more likely to invest if they know who you are and see you as a reputable figure in the real estate industry. This is where things can get tricky because if you’re looking for investors, you’re probably pretty new to real estate investing in the first place. Still, there are plenty of ways to build your reputation and make yourself more of an authority in the field without having a lot of hands-on experience.
This is where it can be especially useful to familiarize yourself with the world of private lending and look for ways to more-or-less become an educator on the subject. From there, you can write blogs, hold free classes, or take other steps to establish yourself as an authority figure. As your name and reputation grows, so will your chances of being able to secure your own real estate funding with investors who are familiar with you.
Focus on Building Relationships
One of the most difficult pieces of advice for many new real estate investors to follow is to focus on building relationships with others—even if they don’t necessarily have any interest in investing in your next project. You never know when you may have an opportunity spring up that they will be interested in, so you never want to write somebody off simply because they’re not a good fit for your current goals.
Remember, successful real estate investing (and fund-raising) is all about who you know. Building relationships with others in the field and maintaining them will always help you grow—even if you may not reap any immediate benefits.
Don’t Forget to Document
Being detail-oriented is one of the best characteristics you can have as a real estate investor. You’ll want to have documentation of everything you do related to any given real estate deal. This includes write-ups for how you calculated potential returns on investment, as well as proposed purchase prices, renovation costs, and any other details related to a purchase.
A hard money lender will not only appreciate this documentation, but many will actually require it. And of course, having everything documented can help you out in the long run by allowing you to reflect on your investments down the road. If mistakes were made, your documentation will make it easier to go back and determine when and how those mistakes occurred so you can prevent them in your next investment.
Show Off What You’ve Done
Last but not least, keep in mind that it never hurts to have a portfolio and do a little “showing off” of successful investments you may have taken on in the past. Even if you’ve never been involved in a real estate investment before, having proof of other investments or similar ventures can be useful when you’re pitching to a lender for the first time.
As you gain more experience with real estate investing, it’s a good idea to build a portfolio and/or website. Don’t be ashamed to talk about your success. The key is to just be mindful that you’re not coming off as “braggy,” as this could be a turn-off to some potential investors. When investors are able to see your past successes, they may feel more confident funding your projects.
The Bottom Line
Securing funding for your first residential or commercial real estate investment isn’t going to be easy—but a little bit of preparation can go a long way. By having a solid understanding of how the world of private money lending works and what these lenders are looking for in an investment pitch, you can move forward with confidence. From there, you can secure the financing you need (less any of your own money that you may be putting into the project) and embark on your real estate investment journey.