4 Smart Ways to Raise Capital Using Residential Real Estate
Are you thinking about investing in real estate? This can be a really good idea. Buying and holding rental properties or flipping properties for a profit can make you a lot of money, if you follow the guidance of an experienced expert. To get rolling in residential real estate investing, of course, you must have some capital. Try some of our tips below to collect capital for your first residential real estate investment.
#1 Home Equity Mortgage
Borrowing money with a home equity loan against your personal residence, or another investment property, is a common way to obtain funds for a first buy and hold or flip investment. Here's how it works: After you own your home for a few years, you will probably have equity in the property from appreciation, paying your mortgage payments, or both. You can take out another mortgage loan and tap that equity to invest in residential real estate.
This can be a smart move because the money that you are borrowing is probably at a low interest rate, such as 3% or 4%. If you invest that money wisely in a property flip, you will get back the principal and some amount of profit in three to six months. You then can either pay back the principal on your home, or continue to use that money to do another flip. If you decide to do a buy and hold rental property, the property should return sufficient cash flow for you to make a good profit, plus pay the home equity loan on your primary residence.
After at least six months of getting steady rent on that property, you may be able to take out a second mortgage on the investment property to do more properties, as well. A home equity loan will provide you with a lump sum of cash that you can use to make your residential real estate investments.
#2 Home Equity Line of Credit (HELOC)
This is similar to a home equity loan. You are tapping equity in your personal residence. The difference is that this is a line of credit similar to a credit card, but it secured by the property. You can get a very low interest rate, and you only pay interest on the amount of the credit line you are currently using.
Note that the line of credit is open only for a set period, commonly 10 years, and you are paying interest only payments that entire time. In year 11, you start to pay back principal plus interest, so you want to be sure that your real estate investments are providing good cash flow or profits.
#3 Hard Money Loan
This is a private loan from a company that loans high interest money based upon the value of the property, not based upon your personal credit situation. Raising capital in this way is best for short term flip projects. Here's how it works: You find an under market value property that you think you can fix up and flip for a profit. The hard money lender will loan you a certain amount of cash – typically 65% to 80% of the after repair value (ARV). You must fund the rest of the purchase, as well as the repairs. Once the house sells, you pay off the hard money lender and keep any profit.
Keep in mind that this is high interest money with rates from 10-17%. You also have to pay origination fees and other lending fees. Hard money is expensive and using means your profits will be lower. But if you lack cash or options to borrow money cheaply, hard money is a solid option.
#4 Private Capital
If you cannot borrow money from your own property and do not want to use hard money, the other option is to find a private person who has a large amount of cash in a bank account or a CD. Some private individuals will lend money to an investor at a reasonable rate of 8-12% with fewer fees than traditional lenders. If you can find a person to loan you money at a reasonable rate, this can really work well for both sides. Many private lenders will only want to engage in short term lending for flips, but you may find a private investor who is willing to lend you money for a few years for buying and holding rental properties.
The Bottom Line
The above four methods are the most common way that investors raise capital for their initial real estate investments. Whichever route you choose, it is vitally important to understand that you must be certain that the real estate investments you select will be profitable so that you can pay back the money you have borrowed. Written by James Swift