Capital for Your Real Estate Transactions: 4 Key Components

Real estate investing has a lot of moving parts involved. One of the main components is raising the capital necessary to fund the deal.

People tend to think that raising money is about marketing, or overcoming objections, however they are very wrong in that sense.

While every transaction involves an “exchange or interaction between people,” real estate transactions are far more intricate. That doesn’t mean you can’t master it.

There are many steps to a successful real estate transaction, but I will share with you the big 4.

#1 The Process

Firstly, raising capital for real estate transactions is about knowledge and awareness. One must understand how money is used in the transaction process—how the money you’re going to borrow from private lenders gets put into play—and also who serves as the competition.

If you have a clear understanding of how money works and how private lenders get paid, you will be able to get your deals funded time after time. As you gain momentum, your network will grow and soon you’ll develop partnerships for the long-haul.

#2 The Rehab Property

As an investor, we’re sure you know what a “rehab property” is… they’re solely purchased to be remodeled and sold for a profit.

When renovating a property with the intention of flipping, the buyer should be the focal point. This typically means making conservative choices that will appeal to a variety of potential buyers.

However, the extent of preparation will not ensure that first time rehabbers will avoid mistakes. This is inevitable.

Instead of going big on your first deal, look for one that can make you the money you need for your next endeavor. Don’t try to “go big or go home”—look for something that needs cosmetic repairs only. Start small and maintain realistic expectations. With each success you can reach higher and achieve more.

#3 The Note or “Promise to Pay”

The promissory note is very similar to the mortgage in that they both state who the borrower and lender are as well as when, where and how the money is to be repaid. The note itself is not secured by the real estate.

In order to secure repayment of the promissory note with real estate, a lender will typically include a mortgage because it secures the promissory note to the real estate. This creates a permanent record in the county in which the real property is located. The recorded document creates “notice of the lien” to anyone who may research title to the property.

#4 The Mortgage

The mortgage defines the consequences of not paying the note.

Technically, a mortgage loan is also a promissory note. The borrower agrees to pay the lender back the principal plus interest over a certain period of time. If the borrower fails to pay back the mortgage, the lender can accelerate the debt. In other words, the entire debt would be due in full.

The mortgage loan is a secured debt. This means that the amount borrowed is reinforced by the real estate property the borrower purchases. If anything were to go wrong on the mortgage loan, the lender can take possession of the property to cover their losses.

The main difference between the note and the mortgage is that the latter is recorded in public record and the former is not.

Here’s an example of how a lucrative deal is broken down:

The purchase price of a property is $52,000. The seller offers a credit of $2,000 for bringing $50,000 cash to closing. The rehab budget is $32,000 and the acquisition fee is $4,000. The amount mortgaged is $86,000 with a commission of $1,500. The interest is fixed at 12% of the $86,000 borrowed or 15% of final profit, whichever is greater.

After the property is remodeled, the list price is $159,000 and $140,000 is the accepted offer. About $128,000 is left after closing and the mortgage and interest are then paid in full.

A $46,000 profit remains after the total amount borrowed and accrued is cleared.

Just a few more tidbits of information to keep in mind…

• Familiarize yourself with the market by researching everything you can pertaining to real estate investing. There’s a lot of information to learn and one can’t possibly tackle everything at once. So take it step-by-step until you’re comfortable with the amount of knowledge you’ve obtained. Once you have the knowledge, you then have the tools to move forward.
• Try to only partner with accredited investors—those who either have an annual income of more than $200,000 per year or a joint income of $300,000, a net worth exceeding $1 million either individually or jointly with his or her spouse excluding the personal residence, or one who is a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
  
• Don’t blatantly advertise your offering to the public—this is unnecessary and can provide the competition with exactly the information they need to beat you out of a deal. However, you can state the reason why you need to borrow the money.

To conclude…

If you’re ready to take the big leap and get started in real estate investing, keep in mind the 4 components of how to raise capital.

Most of all, the difference between successful and unsuccessful investing is a thorough understanding of the process as a whole.

Visit Josh’s website to find out more about his unique real estate investing strategies.