NEW YORK, NEW YORK – APRIL 24: The Jenga Building, named for its address at 56 Leonard street, … [+]
During the last months, private equity real estate investors have closed significantly fewer deals. Transactions in this space were below pre-pandemic levels during the first quarter of 2023, as reported by CoStar. Many institutional investors are sitting on the sidelines too, watching for potential price drops and opportunities related to distressed property.
With so many fluctuations, investors—especially those looking to break in—may find it daunting to gather the money to purchase a property. It can be tough to get people excited as they survey today’s market. In my experience, I’ve found that often the biggest fear holding back individuals from jumping in or acquiring an additional property is a lack of capital.
Even if you’re not looking to raise $100 million, it can be equally as difficult to drum up $2.5 million or even $250,000. That’s because while there are quite a few more institutional equity sources with funds for deals involving $20 or $30 million, there may not be as many places to tap for lower amounts.
Fortunately, by implementing a few key strategies you can find ways to gather the resources needed to buy a property. This involves several finance-related steps, along with working with the right team players to make an acquisition. Here’s an overview to help you get past the capital hurdles of an investment.
Consider Sweat Equity
In many cases, the most valuable asset you can bring to the table is a great opportunity—especially if it’s one that nobody else knows about. If you can source an incredible deal, even the most experienced investors will be eager to lend an ear. Look close to home for opportunities where you have an inside advantage. Have a business plan mapped out so you can present your idea and show the potential of the property you’re considering.
When contributing sweat equity, it’s crucial to choose the right partner. Aim for someone with a solid track record of success and an area of expertise that can complement yours. Together you can work to build a team of players to guide you through the funding and acquisition steps.
Cast a Wide Net
Who among your family and friends might be willing to invest in a great deal that you’ve found? You may be surprised by the answer. When I interviewed Jordan Vogel, the co-founder of Benchmark Real Estate Group, on my podcast, “The Insider’s Edge to Real Estate investing,” he explained how he gathered funds for his first deal. After putting up the deposit with his partner, they scrambled to find the remaining capital they needed. The exercise forced Jordan to think about his relationships with family members and friends. He made a list of all possibilities and reached out to everyone he thought might be interested and able to invest.
As you go through your acquaintances, consider who might have at least $25,000 that they might be willing to invest. Keep in mind these individuals will likely want to hear your plan and what they can expect in returns. If your deal provides them a way to diversify their portfolio, they may be more likely to commit.
Build a Network
Once you’ve tapped sources for capital, keep a running database with their information. Send out regular updates and keep in touch to maintain the relationship. After you’ve had a successful run, you can reach out again to see who might opt into your next deal. The best way to create a network for deal funding is really through word of mouth. Your integrity will go a long way in this field: build a great reputation, and you’ll find it’s easier to get capital for subsequent properties.
Think Long-Term
After Jordan gathered the funds he needed for the initial deal, he went on to acquire more properties, eventually purchasing over $1 billion of residential property in New York City through his firm Benchmark. On my show, his advice for getting over those early fears of raising capital initial fears was to “Just do it.” You learn as you go, he stressed, and over time you can better identify where value could be added to a property.
In the next articles, we’ll look more in-depth at ways to raise capital for a deal. Watch for topics on finding a partner who can help, securing the financing needed, gathering equity, and considering crowdfunding as a source. By following the steps and working with a great deal team, you can overcome capital barriers and get started on your investment journey.