Finding capital to fund your real estate projects is one of the greatest challenges in the real estate development business. If you know where to look, you can find capital that is inexpensive, and that comes from a source that supports your business objectives. If you’ve taken the time to prepare yourself, and your investment business, you will find few challenges in capitalizing your multi-family residential and commercial deals through the use of modern online real estate investment platforms. This article will discuss the common sources and considerations in efficiently obtaining capital now, and over the long-term.
Sources of Real Estate Development Financing
Traditional sources of capital include private money, hard money, convention loans, and commercial mortgages. Obtaining financing from these sources typically requires extensive networking, time investments, and committing to higher interest rates. The emergence of online real estate investment technologies has increased the availability of capital for real estate development and streamlined the funding process. By allowing many investors from across geographic regions to pool their funds, while reducing risk, crowdfunding platforms have made it substantially easier to access capital, and provided an alternative to project leaders that were underserved by the conventional funding model.
Preparing Your Personal Finances & Considering Your Track-Record
Obtaining financing for risky real estate development projects requires a strong personal history of reliability and performance. A career in real estate development requires careful forethought to maintain your credit score, and use your available credit wisely. Although your credit score isn’t necessarily a reflection of your credibility, it is one of the few objective metrics available to financing platforms to ascertain the level of risk associated with partnering in a project with you. For those whom credit may be a challenge, there are alternatives; however, it may be more difficult to coordinate funds, and they will come at a commensurately higher interest-rate.
In addition to your credit score, lenders will also consider your track-record as a borrower, and success of your previous, especially recent, projects. Underwriters will consider the level of returns that you achieved, losses incurred, the timeframe for completion, and whether your projects were completed under or over budget. Each project is akin to an employment experience on your resume; it’s important to treat every project as though it will be part of your permanent record, and will be reviewed by potential investment partners in the future.
Your level of experience, and the management team that you put together, provides a strong indication to investors of your ability to successfully complete the proposed project. When your personal experience is limited, you can bridge the gap by hiring qualified professionals with cross-functional experience in every category of technical and administrative skills that your endeavor will require. Consider hiring a professional business plan writer and consultant to assist you in developing your team and properly representing them in your strategic plans and investor proposals.
Your real estate experience is cumulative. With every project that you complete, your credibility will gradually expand according to the class of property, scope of the project, total project value, efficiency, and profitability. You will experience the greatest success in obtaining financing, if you incrementally increase the scope of your projects according to these metrics; however, don’t pass up on a good opportunity simply because you feel you aren’t ready: just go for it and gather whatever experience you can, regardless of the outcome (as long as it’s likely to be positive).
Risk Factors of Various Transaction Types
The risk profile associated with your proposed project has a tremendous impact on the availability and cost of financing. Significant factors include loan-to-value ratio, lien position, occupancy, and development phase. The lending criteria for property classes varies. Underwriters will have different expectations and limits for 1 to 4-unit residential properties, small multi-families, larger multi-family projects over 20 units, and commercial and industrial properties. Of these criteria, loan-to-value ratio is a primary consideration.
The loan-to-value ratio (LTV) is an indicator of the overall leverage in place, or anticipated, on the property. Acceptable LTVs for commercial projects generally range from 70 to 90% depending on the class of property, investor experience, and other factors mentioned. Lenders will look at the existing LTV as a risk factor for lending additional funds on the property. A high LTV will indicate to investment partners and financiers that the property may be over-leveraged. Excessive LTVs are typically associated with large debt servicing requirements, and potential cash flow issues in the event of high vacancy rates, lease rate declines, or market corrections.
The loan position that is available to the prospective lender also plays a part in underwriting approval and interest rate offered. When a senior lender is already in place, and they are not willing to subordinate to a new lender, this leaves only junior positions available to incoming debt financing. Second, or junior position loans, leave lenders at additional risk; in the event of default, the second position lender may be left with no right of recovery. When the borrower defaults, and foreclosure proceedings are pursued, the senior position lender will have first entitlement to proceeds.
Build Your Record of Success
Getting the funds needed to push your projects forward has never been easier. While there are many project and borrower vetting requirements, the availability of capital afforded by the online real estate investment model is providing more cost-effective financing to the organizers of qualified and profitable projects. Collaborating with leaders in the crowdfunding space will allow you to build your track-record and lay the groundwork for consistent successful ventures going into the future.