One of the most preferred methods of investing is in real estate. In this article, I will give investors tips on financing real estate development and how to go about it.
As a beginner investor, understanding how to finance a deal is just as important as finding one.
Despite real estate is a lucrative investment, it takes time to make money from it.
In this case, whether an end-user or developer, there are ways to finance your real estate investment whether you have access to working capital or not.
Also, read about the cost of building a house in Kenya
What is Real Estate Financing?
Real estate financing is ways in which an investor seeks to secure funds for an impending deal.
Real estate financing comes complete with terms and underwriting, unlike other modes of funding.
This kind of development loans is capital advancements issued to borrowers who need funds for breaking ground on a project, building, and holding the finished product through the leasing stage.
Investors typically rely on real estate development financing to do one of two things: buy raw land to eventually build on or tear down an existing building, only to create a new one.
How do I finance my real estate investment?
Here is how you can finance your real estate development.
- Venture Capitalists
These are high net individuals or corporations who invest in startups that have shown potential.
Investors looking for funding can get more money from venture capitalists because they are usually more willing to lend far more than a traditional small-business loan.
The downside of venture capitalists, however, is that they are very selective in the business that they invest in.
Also, read about the difference between Angel Investors and Venture Capitalists
- Angel investors
These type of investors are well off individuals who are looking to invest in the next big business for a stake in their equity.
Angel investors are known for taking risks while investing in businesses because technically their money isn’t a loan. It represents the acquisition of part of the business.
- Crowdfunding for financing real estate development
Crowdfunding is a way of pooling funds from many investors for large real estate projects.
Small investors usually benefit from this kind of financing because they can put in a small amount of money for large projects.
Crowdsourcing offers recipients flexible terms and is growing in popularity.
- Hard Money Lenders
Hard money lenders usually lend money to investors with less-than-perfect credit or financial history and require a short-term loan.
These kinds of loans are usually backed up by the value of the property as opposed to the borrower’s credit score.
The interest of hard money lenders is usually higher than other types of financing.
An investor can purchase an investment property, rehab it quickly, and make a profit out of it to avoid losses due to high interest rates.
- Private Money Lenders
If you are well connected, you can often tap into those connections and borrow money.
This, however, calls for an agreement beforehand that specifies interest rate and payback period.
Relatives, friends, co-workers, and networking contacts are examples of people who could provide a private money loan.
- Money partners
A money partner is just that… this is an individual you partner with to finance your real estate project just because they have the money.
The money partner must be an individual who has access to funding and can afford you the capital you need.
- Commercial loans
Investors can purchase commercial properties using business loans. These loans carry long durations as opposed to traditional loans. To minimise risk, the commercial loans offer lower interest loans; as a result, it may be harder to receive approval for a business loan.
- Traditional loans
Banks and institutions offer investors these conventional loans and the interest is relatively low.
Interest rates are kept low as a strategy for competitiveness; however, their lengths are typically long, and their underwriting is extensive.
Most traditional loans last anywhere from 15 years to 30 or more and come with an interest rate somewhere in the neighbourhood of four per cent.
- Buying off-plan
Investors and potential homeowners also opt to buy off the property before it is developed.
The investor in this case either can choose to pay for the property in full or in instalments.
An advantage of this kind of real estate financing is that the buyer can get the property at a discount and benefit from potential capital gains.
Traditional loans also come in handy in real estate financing. These loans can be obtained from banks, SACCOs and microfinanciers. These kinds of loans help you to obtain a large amount of money quickly and repay in instalments.
Tips for financing real estate development
- Start by reviewing your strengths before you find financing for real estate development.
- Be straightforward and honest as you lay down the numbers and tell the investors what they can except.
- Give a suitable timeline for completion of the project, profit, the loan amount required, when they can expect to see a return, and how involved you want them to be.
- Transparency when looking for real estate financing is highly recommended. Be ready to share your portfolio if need be.