Some investors see doom and gloom but there are big opportunities in the commercial real estate market for those who can focus on the positives.
Finding reliable and fast financing in the real estate market in 2024 is like threading through the eye of the needle, but investors who know how to raise capital for commercial real estate can earn significant returns.
If you’re one of these investors, you’ll know that finding solid sources of capital is tough due to:
Yet overcoming these challenges is essential in a competitive CRE market. To do this, you will have to consider financing solutions outside of traditional banks, with their tough criteria and low acceptance rates.
But how can you access such funding?
In what follows, we will explain the challenges with traditional banks and highlight eight ways you can raise capital for CRE outside the traditional banking system (including the top tips that will help you succeed).
[Paying earnest money deposits is now a norm for CRE transactions. Sign up for Duckfund to get earnest money financing for all your CRE deals.]
The rise in interest rates in the US between 2022 and 2023 led to high borrowing costs, resulting in a tight lending market, according to commercial real estate analysis.
Tight lending markets often lead to falling property prices and a dampening of supply and demand, according to the International Monetary Fund (IMF).
Significant net shares of US banks reported tightened standards for the commercial real estate industry in Q1, 2024, according to a survey by the Federal Reserve.
Source: Federal Reserve
Also, several banks reported lower demand for “construction and land development loans” and a significant net share of banks reported “weaker demand for loans secured by nonfarm nonresidential and multifamily residential properties.”
However, falling prices of commercial properties provide an opportunity for investors who can access the funding needed to snatch up quality properties at lower prices.
Given that economists expect a rate cut later this year, investors who can buy now may have significant opportunities to increase their return on investment (ROI).
In real estate, equity investors are people who become shareholders in the property in proportion to the amount they contributed towards its purchase.
With stocks, shareholders are rewarded with either dividends or capital appreciation.
The same thing applies in the CRE market. Equity investors will have a share of net profit (rent minus maintenance costs) according to the number of shares they hold.
Also, when there is a property sale, the net receipts will be distributed according to the number of shares held.
As an investor, your ability to secure equity investors often depends on the strength and value of your personal and professional networks. Some of them may be fellow real estate investors, institutional investors, or even friends and family members.
“The deal always comes first,” they said. If you can find good deals to present to potential equity investors, finding investors becomes “a lot easier.”
A great tip is to start on the front foot before you start investing and build relationships with property investors and real estate businesses. Then, when you get real estate development and investment opportunities, you’ll have a list of contacts ready to work with.
This can be easier to crack if you have someone in your network who knows any of the investors in that property. Such a person can make an introduction and set the ball rolling.
A market analysis is also needed here to identify institutional investors who have an interest in real estate to begin with.
A real estate syndicate is a group of people who combine resources to invest in real estate properties.
Members of real estate syndicates are equity investors. The lead investor, also known as the syndicator, is the most active member – in charge of investment identification, property vetting, and property management.
Other members are often passive, contributing only the investment capital (though professionals can be employed to assist the syndicator).
Once a syndicate has been created, it can invest in multiple properties. That is, a syndicate is not limited to a single transaction; the relationship can exist for as long as the members of the syndicate are interested in working together.
If you are considering raising capital for real estate investment, you can go the route of real estate syndication and be the syndicator.
However, if you don’t have the network, time, or personality to do the work of a lead investor, then perhaps you can nominate someone else in the network to take on this role.
Before you can prepare a credible PPM, you must have done the necessary background work – calculating ROI and highlighting all relevant risk factors.
Joint ventures, like syndicates, are composed of equity investors. They are also a great option if you are considering how to raise equity for real estate, but there’s one key difference: they’re more flexible.
For example, if a joint venture consists of two partners, both may actively manage operations or one person might manage the operations while the other agrees to contribute more funds.
In some cases, one of the business partners may not contribute funds at all.
Consider a joint venture between an investor (supplying the funds), the owner of the land, and a real estate developer (or another real estate professional). In this example, only the investor is contributing the investment capital.
A joint venture agreement will specify what each member is contributing, how profits or losses will be distributed, and how the agreement will be dissolved.
Though joint ventures are usually created for a single project, they can also be used to finance multiple CRE transactions.
Crowdfunding is another way to raise capital through equity investors.
Unlike syndicates and joint ventures, they often involve a large number of people contributing small amounts of money.
The minimal investment amount is often low, which encourages retail and non-accredited investors (those with a net worth of less than $1 million and annual income of less than $200,000) to participate.
"Crowdfunded real estate investing takes the power of the internet and technology and makes real estate investment accessible and scalable for the private investor,” says Adam Gower, CEO of GowerCrowd, a real estate digital marketing platform. “The innovation has the power to completely transform real estate investing, and the way the developers fund individual projects."
If you want to go this route, you can register on any of the crowdfunding platforms and pitch your investment ideas.
Like syndicates, your pitch will also include a rate of return that investors can expect to earn on the property. Thus, you must do proper foundational work to identify the return and risk profile of the investment.
You can get private money loans from wealthy individuals (peer-to-peer loans) or financial organizations that are not regulated like traditional banks.
Accessibility is the main advantage of private money lending over traditional bank loans. Private money lenders have lower lending criteria and more flexible terms.
Private money loans are typically short-term (less than a year) though medium-term loans (up to five years) are not impossible.
Private lenders make up for this flexibility with a higher interest rate than banks. Also, these lenders will require collateral, which is often the property in question.
Though they may ask for credit and income documents, conditions are less stringent and the focus is on the financial viability of the current deal.
While new investors will pay high interest rates and make higher down payments, those with experience (track record) can get more favorable terms.
If you’re wondering how to finance a commercial property without liquidity then hard money lending is an option.
A hard money lender uses the value of a hard asset to determine loan amount and terms. In the case of real estate, hard money lenders will determine loan amounts and terms based on the value of the property of interest.
Hard money and private money loans are often used interchangeably. They are similar in terms of accessibility, flexibility, and the short-term nature of the financing deals.
However, there are a few differences between them.
“The key difference between a hard money lender and a private money lender is how they manage their appetite for risk and how that translates to the pricing and leverage they offer,” according to George Fraguio, a Vice President at Vaster.
Hard money loans won’t typically consider experience, income, and credit. They tend to focus almost exclusively on the asset value while any risk resulting from those three other factors is compensated for with higher interest rates.
Some private money lenders may also require evidence of liquidity to confirm that interest payments can be made for the next six months; hard money lenders won’t require such.
Finally, hard money lenders tend to require shorter repayment periods, offering less flexibility as regards the repayment schedule, according to Mbrace LLC, a private money lender.
If you have a very poor credit history but you are confident about repaying the loan, a hard money loan can be a better option. However, if your credit score is only below average and you have good experience in the market, a private money loan is better.
Real estate wholesaling involves entering into a contract with a seller (without paying for the property) and then assigning the contract to a third party who is the actual buyer (who will pay for the property).
Wholesaling is also known as double closing because the wholesaler enters into a contract with both the seller and the final buyer.
Wholesalers make money from the difference between the price the seller wants to sell and the price they can negotiate with the final buyer.
There is another form of wholesaling called transactional funding.
Here, the wholesaler borrows money from a gator lender to pay the seller for the property and then sells (within the same day or in a few days) the property to the final buyer at a higher price.
The loan is repaid when the sale is completed and the wholesaler profits from the price difference (minus the loan financing cost).
If you excel at identifying good investments and marketing them but don’t have the cash to buy them yourself, wholesaling can be a good way to make money from the real estate market.
If you have mastered how to raise capital for commercial real estate through any of the options above, then you can consider starting a real estate private equity firm.
While the options above focus on using people’s money (with or without your own money) to finance a few investments here and there, a real estate private equity firm is permanently established to pool resources from investors and invest them in a diversified portfolio of real estate investments.
Typical investors in a private equity firm are institutional investors and high-net-worth investors (HNWI). Also, the investment portfolio of a real estate private equity firm will include land development, rental properties, flipping, redevelopment of existing properties, and investment in new and exciting niches (like data centers and film studios).
The fund manager is also called the general partner while investors are called limited partners. Private equity firms can be structured as a limited liability company (LLC) or a limited partnership (LP).
While many investors are worrying about how to raise capital for commercial real estate deals, they forget about good faith deposits (earnest money deposits).
It has become the norm in the US that CRE buyers must pay earnest money deposits (a percentage of the purchase price paid upfront) before sellers can allow them to inspect and negotiate the price and purchase terms of properties.
This means you must find a way to raise earnest money deposits (and get a foot in the door) before you start worrying about raising capital to purchase the property.
How much earnest money you will pay in the US differs across states and it is helpful to be familiar with the average requirement so you can make better plans.
Thankfully, raising earnest money deposits doesn’t have to be complicated. With a financing company like Duckfund, you can complete an application for earnest money deposits in two minutes and get access to the required funds within 48 hours.
It gets even better. Our Sign Now Pay Later model means you can raise earnest money deposits for multiple deals, allowing you to pursue as many CRE deals as you desire at the same time.
Unlock the door to amazing CRE deals with Duckfund’s fast and easy earnest money financing.
[What are you waiting for? Sign up to Duckfund to quickly and cost-effectively secure earnest money deposits for all your CRE deals in the US.]
