Investing in real estate has become synonymous with the American dream, and for good reason; just about anyone can do it. What’s more, there isn’t an investment vehicle more capable of helping individuals achieve financial freedom than real estate.

The housing sector is firing on all cylinders at the moment, and there is no reason people can’t get in on the action. The barrier to entry is so low that all you need is the right amount of passion, a little due diligence and a sound real estate education.

It is important to note, however, that something of great importance is missing from that list: capital. While capital is absolutely necessary to invest in real estate, there is no rule to suggest the money must come out of your own pocket.

In fact, you don’t have to invest any of your own money at all; it is entirely possible to invest in real estate solely through the use of other people’s money.

We will now talk about some ways you can actually go into the real estate business without puting in your own money, raising funds from other sources.

• What Is Investment Capital Exactly?
• How do Real Estate Investors Raise Funds?
• Is it Better to Buy Real Estate or Stocks?
• How To Secure Real Estate Investment Capital
• How Much Can You Make as a Real Estate Agent
• What Does It Take to Be Successful as a Real Estate Agent?
• How Quickly Can You Generate Your First Commission?

What Is Investment Capital Exactly?

This refers to the money used to fund a real estate venture. This money could cover the costs of buying an investment property, initial renovations, and other extra costs. There are two main kinds of investment capital: equity and debt.

How do Real Estate Investors Raise Funds?

There are many other ways apart from saving to buy a house. What makes property acquisition possible for other investors is Other People’s Money (OPM). Experienced real estate investors have learned how to use OPM to maximize returns and reduce liability.

Read Also: Starting Real Estate Investing With Just $500

With that in mind, here are six ways real estate investors raise capital for real estate investing.

Private Money Lenders

Private money lenders are individuals that have access to capital which they wish to invest. Such lenders are not affiliated with any financial institution and bank and therefore deal with borrowers directly.

Since private lenders don’t have as much ‘red tape’ as traditional lenders, the financing process is much faster and stress-free.

Money raised from real estate partnership with private money lenders can be used for:

• Refinancing a property – Let’s say you bought an investment property using a conventional mortgage, but wish to negotiate a shorter repayment timeline or better interest rate. Private money lenders can help you refinance, thus significantly lowering the associated costs.
• Buying a new property – Investors can also use private money to buy new investment properties – condos, multifamily homes, single-family homes or apartments. The key to acquiring such loans is to craft the right pitch and run the numbers using a reliable real estate investment calculator (here’s a great one). If you are a first-time investor, talk about the potential profitability. Experienced investors can show evidence of successful real estate deals in the past.

Hard Money Lenders

Hard money lenders are semi-institutionalized lenders that are licensed to offer loans. This alternative source of funding has become very popular with real estate investors all over the world.

Most hard money lenders will ask for between 12-15% in interest, as well as a one-time, upfront fee to process the loan. Unlike banks where it could take months before funds are released, hard money lenders provide investors with almost instant access to money.

Hard money loans are especially useful for:

• A real estate investor doing a gut rehab
• Investors doing a quick property flip
• People that cannot access traditional mortgages because of poor credit scores
• First-time real estate investors     

Traditional Investment Property Financing from a Bank

Bank mortgages are one of the most popular methods used to raise capital for real estate ventures. Banks usually assess applicants’ debt to income ratios, credit histories, and assets by looking at documents such as:

• Recent payslips
• Bank statements
• W-2 forms and tax returns
• Credit history

Your chances of getting approved for a mortgage or investment property loan will be high if you have a great credit score, minimal debt, and a stable income.

Peer-to-Peer Loan

Crowdfunding is becoming increasingly popular as a strategy to raise money for real estate investing. According to Allied Market Research, the global peer-to-peer lending market is likely to hit over $460,312 million in 2022. This unconventional funding method is therefore worth considering when buying a house for investment.

So how does it work? A crowdfunding marketplace simply matches lenders (investors and individuals) via an online service. With the low overhead costs involved, P2P loans are more affordable than conventional mortgages. Though a good credit score is required, you can still get approved for a loan with a less than perfect score.

When evaluating P2P loan platforms, be sure to check the following aspects:

• Data security features
• Required upfront origination fees
• Privacy policies regarding personal data

FHA Investment Loan

If you want an investment loan with lower requirements, you could opt for the Federal Housing Administration (FHA) loan. Since such loans are insured by the FHA, lenders offer friendly terms.

For example, the down payment for investment property required for an FHA loan is only 3.5%, unlike other lenders that charge 20%. However, to qualify for this low offer, you must have a FICO score of not less than 580.

In addition to this, FHA loans are usually reserved for owner-occupied properties. In order to make it work for an investment property, you must use the loan to purchase a multifamily home, reside in one unit, and rent out the others. This will mean earning a rental income while living rent-free.

Based on the time set by your mortgage lender (usually up to 1 year), you can then move out and rent out all the units. So if you are thinking of how to buy a multifamily property with no money, an FHA loan is the way to go.

Wholesaling Real Estate

When it comes to how to raise capital for real estate, wholesaling is a commonly overlooked strategy. Though not traditionally considered a source of funding, wholesaling is a practice that has helped savvy real estate investors get funding quickly. When executed well, investors can make money within hours from a wholesale deal without spending their own money.

In this strategy, the real estate investor (wholesaler) contracts a property with a seller, looks for a potential buyer interested in buying it, and then assigns the contract to them. The idea is to sell the property to an interested buyer before the contract with the homeowner lapses.

The wholesaler makes money by selling the property at a price higher than the initial amount quoted by the seller. Profits earned can then be used as capital for real estate deals.

Since real estate investors don’t actually buy the investment property, wholesaling is not as risky as flipping. Flipping involves costs such as insurance, property taxes, and mortgage. The capital required for wholesaling is also much less than that needed for flipping.

Is it Better to Buy Real Estate or Stocks?

Many investors have traditionally turned to the stock market as a place to put their investing dollars. While stocks are a well-known investment option, not everyone knows that buying real estate is also considered an investment.

Under the right circumstances, real estate offers an alternative that can be lower risk, yield better returns, and offer greater diversification.

Whether it’s planning for retirement, saving for a college fund, or earning residual income, you need an investment strategy that fits your budget and your needs. Comparing an investment in real estate to buying stocks is a good place to start.

Real Estate vs. Stocks

Investing in real estate or stocks is a personal choice that depends on your pocketbook, risk tolerance, goals, and investment style. It’s safe to assume that more people invest in the stock market, perhaps because it doesn’t take as much time or money to buy stocks. If you’re buying real estate, you’re going to have to save and put down a substantial amount of money.

When you buy stocks, you buy a tiny piece of that company. In general, you make money two ways: As the value of the company’s stock increases, the value of your investment goes up, too. And, depending on the company, you may receive regular dividends, which you can reinvest to grow your investment.

When you buy real estate, you acquire physical land or property. Most real estate investors make money by collecting rents (which can provide a steady income stream) and through appreciation, as the property’s value goes up.

Also, since real estate can be leveraged, it’s possible to expand your holdings even if you can’t afford to pay cash outright.

For many prospective investors, real estate is appealing because it is a tangible asset that can be controlled, with the added benefit of diversification. Real estate investors who buy property own something concrete for which they can be accountable.

Note that this article does not focus on real estate investment trusts (REITs), which are a way to invest in real estate through financial products that are bought and sold like stocks.

There are a number of considerations for investors when choosing between investing in stocks or buying real estate as an investment.

Returns for Stock Market vs. Real Estate

Investing in the stock market makes the most sense when paired with benefits that boost your returns, such as company matching or catch-up contributions.

But those perks are not always available and there is a limit to how much you can benefit from them. Investing in the stock market independently can be unpredictable and the return on investment is often lower than expected.

Comparing the returns of real estate and the stock market is an apples-to-oranges comparison—the factors that affect prices, values, and returns are very distinct. However, we can get a general idea by comparing the S&P 500 ETF Total Return (SPY) and the Vanguard Real Estate ETF Total Return (VNQ):

As the chart demonstrates, both real estate and stocks can take a big hit during economic recessions. Note the big dips that occurred during the 2008 Great Recession and the 2020 COVID-19 crisis.

Real Estate vs. Stock Risks

The housing bubble and banking crisis of 2008 brought a decline in value for investors in the real estate and the stock markets—and the COVID-19 crisis is doing it all over again, albeit for different reasons. Still, it’s important to remember that stocks and real estate have very different risks overall.

Real Estate

Here are some things to consider when it comes to real estate and the risks associated with it. The most important risk that people miss is that real estate requires a lot of research.

It’s not something you can go into casually and expect immediate results and returns. Real estate is not an asset that’s easily liquidated, and it can’t be cashed in quickly. This means you can’t cash it in when you’re in a bind.

For house flippers or those who have rental properties, there are risks that come with handling repairs or managing rentals on your own.

Some of the main issues you’ll come across are the great costs, not to mention the time and headache of having to deal with tenants. It isn’t something you can do during your off-time—especially if it’s a rental.

Tenants will always need something, and you may not be able to put them off if there’s an emergency. As an investor, you may want and need to consider hiring a contractor to handle repairs and renovations of your flip, or a property manager to oversee the upkeep of your rental. This may cut into your bottom line, but it does reduce your valuable time overseeing your investment.

Stock Market

The stock market is subject to several different kinds of risk: Market risk, economic risks, and inflationary risk.

First, stock values can be extremely volatile—as the coronavirus pandemic has demonstrated yet again—their prices are subject to fluctuations in the market. Volatility can be caused by geopolitical as well as company-specific events.

Say, for instance, a company has operations in another country. This foreign division is subject to the laws and rules of that nation.

But if that country’s economy has problems, or any political troubles arise, that company’s stock may suffer. Stocks are also subject to the economic cycle as well as monetary policy, regulations, tax revisions, or even changes in the interest rates set by a country’s central bank.

Other risks may stem from the investor himself. Investors who choose not to diversify their holdings, or rely on specific types of stocks are also setting themselves up for a higher risk.

Consider this: Dividend-paying stocks can generate reliable income, but it would take a considerable investment in a high dividend stock to generate enough income to sustain retirement without selling additional securities.

Relying solely on high dividend stocks means an investor may miss out on opportunities for higher growth investments.

Advantages and Disadvantages of Investing in Real Estate

Real estate investors have the ability to gain leverage on their capital and take advantage of substantial tax benefits. Although real estate is not nearly as liquid as the stock market, the long-term cash flow provides passive income and the promise of appreciation.

Despite this, it’s important to consider the amount of money that goes into real estate investments. You need to have the ability to secure a down payment and financing if you aren’t making all-cash deals.

Since real estate isn’t as liquid, you can’t rely on selling your properties immediately when you may be in need. Other disadvantages include the costs associated with property management and the investment of time that goes into repairs and maintenance.

Advantages

• Passive income
• Tax advantages
• Hedge against inflation
• Ability to leverage

Disadvantages

• More work than buying stocks
• Expensive and illiquid
• High transaction costs
• Appreciation isn’t guaranteed

Advantages and Disadvantages of the Stock Market

For most investors, it does not take a huge cash infusion to get started in the stock market, making it an appealing option. Unlike real estate, stocks are liquid and are generally easily bought and sold, so you can rely on them in case of emergencies. With so many stocks and ETFs to choose from, it can be easy to build a well-diversified portfolio.

But, as noted above, stocks tend to be more volatile, leading to a more risky investment. Selling your stocks may result in a capital gains tax, making your tax burden much heavier. And unless you have a lot of money in the market, your holdings may not be able to grow much.

Advantages

• Highly liquid
• Easy to diversify
• Low transaction fees
• Easy to add to tax-advantaged retirement accounts

Disadvantages

• More volatile than real estate
• Selling stocks can trigger big taxes
• Some stocks move sideways for years
• Potential for emotional investing

Additional Factors to Consider

Buying property requires more initial capital than investing in stocks, mutual funds, or even real estate investment trusts. However, when purchasing property, investors have more leverage over their money, enabling them to buy a more valuable investment vehicle.

Putting $25,000 into securities buys $25,000 in value. Conversely, the same investment in real estate could buy $125,000 in property with a mortgage and tax-deductible interest.

Cash garnered from rent is expected to cover the mortgage, insurance, property taxes, and repairs. But a well-managed property also generates income for the owners. Additional real estate investment benefits include depreciation and other tax write-offs.

Real estate that generates monthly rental income can increase with inflation even in a rent-controlled area, which offers an additional advantage. Another consideration is taxes after selling the investment.

Selling stocks typically results in capital gains taxes. Real estate capital gains can be deferred if another property is purchased after the sale, called a 1031 exchange in the tax code.

Real estate and stocks both present risks and rewards. Investing in the stock market receives a lot of attention as a retirement investment vehicle, particularly for people who contribute regularly to a 401(k) or Roth IRA. However, diversification is important, especially when saving for the long term.

Investors should opt for a variety of asset classes or sectors to reduce their risk. Investing in real estate is an ideal way to diversify your investment portfolio, reduce risks, and maximize returns.

Keep in mind that many investors put money into both the stock market and real estate. And if you like the idea of investing in real estate but don’t want to own and manage properties, a real estate investment trust (REIT) might be worth a second look.

How To Secure Real Estate Investment Capital

Raising capital for real estate deals requires investors to know more than where to find sources; it also requires them to know how to secure the money once they know where to get it.

Consequently, once investors have learned where to find the money they need, they must then learn how to appeal to those who have the money the need.

Again, there are countless lenders simply waiting to lend their funds to today’s investors. However, it’s up to the investor to prove they are worth the investment.

Let’s take a look at some of the most important characteristics venture capitalists and private money lenders look for in those who want to raise capital for real estate ventures.

Seasoned Experience

It should go without saying, but the more investors are comfortable investing in you as a person, the more likely you are to receive capital. Experience goes a long way in establishing credibility, and therefore in raising capital for real estate investments.

Nothing has the ability to instill confidence in those parting ways with a large sum of money than experience; the peace of mind it creates can’t be underestimated.

However, experience is not something every investor has the luxury of boasting. New investors, for that matter, have essentially no experience to offer at all. With that in mind, how can new investors compensate for a lack of experience?

It is important to note that even the most successful investors were once “green” behind the ears; nobody is able to boast years of experience right out of the gate.

New investors are therefore advised to compensate for their lack of experience with preparation, knowledge and an acute attention to detail. You would be surprised at how far a little due diligence and drive can take even the most inexperienced investors. At this point, you must carry yourself with confidence; don’t let your experience, or lack thereof, take centerstage on a given deal.

In reality, venture capitalists and money lenders are looking to work with those that they feel comfortable giving their money to. If you can’t convince them with years of experience that you are the horse to bet on, do so by giving them peace of mind. Prove to those you are looking to borrow from that you have done your homework.

Team Composition

The best investors are well aware of the fact that real estate is a people business. Every single transaction requires the cooperation of at least two parties, if not more so. That said, if you want to learn how to raise capital for real estate ventures, you must work well with others, especially your own team.

Private money lenders will place an emphasis on the rapport you have with your team, and for good reason. A competent team with the right leader is capable of just about anything. But what makes a competent team? What will money lenders look for in your team before they decide to give you the capital necessary to fund a deal?

Learning how to raise capital for real estate ventures starts with your team composition. Before you even consider asking for money, see to it that your team exhibits the following qualities:

• Passion: The best teams exhibit a passion that is contagious. However, it is important to note that passion starts at the top and trickles down. To lead a passionate team, you, yourself, must be passionate about your future endeavors. Let people know how excited you are about the future of your company, and I guarantee people will be intrigued in the idea of working with you. At the very least, they will know your heart is in the right place.
• Tenacity: Not all that dissimilar from passion, tenacity compliments passion and gives entrepreneurs the stamina to see their vision through to the end. Some say tenacity is all that separates a good investor from a great one. While the verdict is still out on that, there is no doubt in my mind that an inherent team tenacity can go a long way in convincing others to work on your behalf.
• Flexibility: Entrepreneurs who are not flexible are inherently rigid. That said, rigid investors are more prone to suffering from complications because of their inability to adapt. Flexibility, for that matter, awards investors the opportunity to think on their feet and roll with the punches. The most prominent entrepreneurs of our time have all demonstrated an ability to be flexible; nothing has the power to mitigate risk quite like the ability to adapt to changing circumstances.
• Commitment: Few things are more important to an entrepreneur than his or her team, and few things are more important to a team than commitment. Without commitment, even the most talented real estate teams can fall apart. As an investor, it is in your best interest to illicit unwavering commitment from those you choose to work alongside. At the very least, I can assure you potential investors will want to see a certain level of commitment from those they are entrusting their money to.
• Teamwork: Otherwise referred to as chemistry, teamwork is essentially the barometer by which most outside investors will make their decision. A team that can work together without getting in its own way is a force to be reckoned with, and venture capitalists are more than aware of its power. Prove to investors that you can work well with others, and they will most likely want to work with you.
• “Coachability”: In my opinion, if you are not coachable, you are ignorant. For what it’s worth, the smartest men are the ones who know they don’t know everything. Humility can go a long way in gaining the trust of others. If you are willing to not only learn, but also admit when you are wrong, you will open up a whole new world of working in tandem with others.
• Knowledge: Perhaps more so than any other characteristic on this list, knowledge is power; it is your most important asset. Knowledge will see to it that everything is in working order. If for nothing else, a sound real estate education is the single most important trait a team can boast.

Opportunity

Again, one of the best ways to raise capital for real estate ventures is to convince money lenders that you are worth their time. For what it’s worth, nothing will convince lenders to give you money faster than the opportunities you present to them.

More specifically, the deal you are looking to fund should illicit some excitement. Remember, you are the one raising capital for real estate investments. It is up to you to make sure they want to lend you money.

The house you intend to invest in should do most of the work. That said, run the numbers yourself and provide lenders with a reason to believe their money isn’t better off being spent elsewhere.

At this point, you will want to be upfront and divulge your intentions. Tell them how much you are looking for, and what an investment in your business could potentially return.

Leave no stone unturned, as smart money lenders will want to mitigate their risk as much as possible. If they are asking questions you don’t know the answer to, you have a lot more work to do.

It is up to you to account for everything on a deal. If you can prove to them that you have dotted all your i’s and crossed all of your t’s, the right opportunity will sell itself.

Investing in real estate successfully will require you to mitigate risk, and private money lenders are no exception. They are not in the business of throwing money away. They will want to make sure the opportunity you present them is a sure thing.

Raising capital for real estate investing is an integral step for every real estate investor. However, few are aware that they are not selling lenders on respective deals, but rather themselves.

While the property in question is a large reason people will lend money, it is only a fraction of the equation; lenders want to feel comfortable with those they are giving their money to.

The most successful lenders, for that matter, have learned how to identify the best investors; those that will take the best care of their money and return it with interest. If you want to be the investor lenders line up for, be sure to exercise these traits on a daily basis.

How Much Can You Make as a Real Estate Agent

Becoming a real estate agent is one way you can earn a six-figure income, even if you don’t have a college degree.

However, many people earn less than six figures, and most even quit their work as a real estate agent before they earn their first commission.

How much can you earn as a real estate agent? We explore the income potential for real estate agents below.

The vast majority of real estate agents are commission-based agents. That means that they earn most (or all) of their income when they sell (or help buy) a house.

Generally speaking, when a person sells a house with the help of a real estate agent, the seller pays a 5-6% commission on the sales price of the home. The commission is then split between the selling agent and the buying agent.

A common arrangement is for each side to earn a 3% commission. When selling a house for $250,000, each agent can expect to earn $7,500.

Of course, the commission may be split among more than just the buyer and seller. Then, the broker (i.e. the company that the agent works for) may also earn a piece of the commission (up to 50% for new agents).

Real estate agents also need to pay for their own expenses (including driving customers around, professional association fees, signs, advertising expenses, and other expenses).

So, in the above example of earning $7,500 on the sale, the individual agent my only get $2,500 or so after expenses.

With so much money riding on each transaction, the real question is: how many transactions can a real estate agent complete each year? On average, members of the National Association of Realtors complete 12 transactions each year.

If the average real estate agent earns $5,000 per transaction (after expenses), they would net $60,000 annually. However, these real estate agents have an average of 10 years of experience. Newer real estate agents will likely sell even fewer houses, and have lower incomes.

According to the Bureau of Labor Statistics, the average real estate agent earns $45,990 each year, but the range in income is massive. One-tenth of real estate agents earned less than $23,000, and 10% earned more than $110,000.

It is important to note that some real estate agents only work on a part-time basis, but most work a full 40 hours per week.

What Does It Take to Be Successful as a Real Estate Agent?

If you want to earn a six-figure income as a real estate agent, then you’re going to need more than just a few yard signs to earn a great income.

In particular, real estate agents need to be very careful to watch their expenses, especially advertising expenses (on sites such as Zillow) which can eat up a huge chunk of profits. The more money you can keep on each transaction, the more money you’ll earn overall.

When you do spend money, you’ll want to be very careful about how you spend it. Some real estate agents choose to invest their advertising dollars in Facebook ads, and maintaining a clean and easy-to-find online presence.

Others invest in mailers to send to people that may want to sell their house in the near future. Some successful agents work on growing their “organic” social reach by creating custom videos for each homebuyer.

Read Also: 10 Real Estate Opportunities for Entrepreneurs in 2020

These videos have music, pictures of the new house, and of the buyer outside their house. Many happy clients share these videos on Facebook to announce their big purchase.

Eventually, many real estate agents turn into a broker and hire agents to work under them. These agents have somewhat lower costs (which are covered by the hiring agent), but they earn lower commissions since the hiring agent takes a cut. Adding agents to your team is one way that many real estate agents add income without adding a ton of extra work.

Another important consideration is to treat each customer with great customer service. Although buying a house is a big deal, people buy and sell houses as often as every few years.

If you’re a great agent, you will have repeat customers (and customers who refer their friends to you). Word of mouth is still the most powerful way to generate business.

Also, it really does pay to be in an expensive housing market. Selling $100,000 condos earns next to nothing, but selling $500,000 to $1,000,000 homes on the regular can be a much more lucrative prospect. 

How Quickly Can You Generate Your First Commission?

One of the big keys to becoming a successful real estate agent is generating your first commission quickly. Real estate agents often have to front several thousand dollars worth of costs (licenses, education, ads, and signs) before ever finding their first client. The longer it takes to generate your first commission, the longer you’ll bleed out money without being compensated.

To be sure you earn money quickly, let your friends and family know that you’re a real estate agent. Let people know via social media, and through personal contact. Whenever people mention they might move, let them know you’re an agent.

It might sound obnoxious, but you have to get the word out. Once you’ve completed a few transactions, you should start to see your business grow through referrals.

If you need an income before you can generate your first commission, you might want to find hourly work at a real estate agency. Whether you’re doing clerical work, advertising work, or marketing, you’ll be gaining experience in the right field and earning an income. Hopefully your work at a real estate agency will also leave you with some time to build your business as an agent too.

It’s important to understand how real estate agents are compensated when considering the field. If you look at every real estate license, the average home sale per license is one every two years. That means many agents aren’t making much money.

As a consumer, when you hire an agent, you want one that it’s the top 10% of earners. This proves they have a track record of selling homes in your area. You probably don’t want one that only sells 1-2 homes per year, even if they give you a good break on commissions.

Finally

Raising capital for real estate deals is not as difficult as many people imagine. The most important thing when learning how to raise capital for real estate is to know what lenders want and give it to them. This will greatly enhance your chances of securing the financing that you require for investment property.