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Generally speaking, real estate investors can source capital through capital raising for private equity funds.
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Debt is taken in form of a loan from a financial institution. The property purchased using this loan act as security for the loan. This means that if for whatever reason the investor failed to honour repayment obligations over a given period. The property shall be foreclosed on by the lender.
Debt is easily accessible if you have a good credit score, the project is good, and if you have put a substantial amount of down payment in the deal. Debt acts as leverage and gives you an opportunity to own a property when you have a small down payment.
If the real estate industry crushes while you haven’t completed the repayment of the loan, you will risk having your property listed as foreclosed.
Here are debt lenders that real estate investors can use:
SACCOs: These are institutions that members come together, save and borrow from the same institution. It tends to have a low amount of interest rate as compared to commercial banks. These terms and conditions for the loan are always friendly.
Banks: If you have a good credit score, have a good statement, you can easily access loans from commercial banks. However, depending on the type of investment, banks have different interest rates for different real estate products. For instance, commercial properties tend to attract more interest as compared to residential properties.
Land investors tend not to easily access loans to purchase vacant land. This is because banks consider this kind of loan extremely risky. Thus, banks tend to charge higher interest rates as a way of discouraging their uptake.
Equity
Equity is basically what you actually own in your pocket. It could be from the savings of your business or your full-time job.
This kind of capital in real estate carries a high level of risk as you can lose everything if the deal goes against you. And its return potential is unlimited.
Below are some types of Equity that real estate investors do have;
Family and friends: This is where most of the investors started. These people come together and contribute starting from few dollars, other kick starts you with substantial capital. They are few or no terms at all for this type of capital sourcing.
Crowd-funding: This is a new way of sourcing capital in real estate. These are platforms that connect investors with private developers. Investors fund the projects by contributing as little as 5 dollars. This is the most flexible way of accessing capital from a pool of investors and with few regulations on how to use the funds collected.
Chamas (merry–go round): This is perhaps the most informal way of raising capital that people working mostly in the informal sector used as a way of saving their income. When someone is planning to buy a plot, for instance, he/she starts joining a Chama whose members are motivated and contribute toward real estate properties.
Family offices: These are typically small family offices that manage investments of multi-million family wealth. If they like your investment deal, they get the deal done for you and you get your share out of it.
Institutional Money: If you are looking for a large amount of capital, then you will need to go for a larger institution that has a large pool of funds. These institutions include pension funds, foundations, and college endowments. These investors demand strict booking keeping and audited books of accounts. They are risk-averse. It is the cheapest source of real estate capital as compared to other sources of capital.
Real estate investments need a substantial amount of capital that can be raised through different ways in the market. Both equity and debt are two known ways of raising capital to use in business.
