Top 3 Ways to Finance Your Real Estate Business
Getting a real estate business off the ground is no easy task, no matter your financial situation. And it’s only harder when you’re running on a very limited budget. However, it’s not impossible, as modern-day entrepreneurs have different funding options at their disposal to help them secure the capital they need for their venture. The most important thing is to do your research and develop a clear understanding of your options so that you’ll be able to make the critical decisions when it comes to choosing the appropriate one for you. In this article, we’ll go over some of the most popular and viable options for financing your real estate business.
The alternative lending market has expanded and exponentially grown in popularity over the past couple of years. The reason for that is that non-bank lenders (private individuals or groups) have a much simpler and faster loan application process in comparison to traditional lending systems. Through these non-traditional lending institutions, entrepreneurs are given a much better chance and extensive corporate procedures aren’t slowing down the underwriting process. And when it comes to backing up riskier projects, private lenders are certainly going to be more open to the possibility than a bank.
Naturally, these benefits come at their own price – often higher interest rates and significant down payment or personal collateral. You’re best advised to have a clear plan (and a backup too) and be realistically confident about how you can repay the loan quickly before taking on this venture.
But another extremely important factor to note is that not all alternative lenders are the same, so choose carefully. Your best bet is using a legitimate digital lending platform such as Lendio, which uses sophisticated AI systems to match you to a whole network of lenders in one streamlined application process. These types of applications offer transparency and you can use this simple calculator to establish a comprehensive plan for financing your business.
Small Business Administration (SBA) loans are guaranteed by the federal agency, allowing lenders (both traditional and non-traditional) to structure these offers with low interest rates and flexible terms. Banks are more open to taking on the risk when these types of loans are in question because the SBA provides them with a guarantee of repayment if they agree to underwrite a loan to a new entrepreneur.
On top of these benefits, SBA loans will also usually have significantly higher borrowing limits in comparison to other funding methods, as well as lower down payments and protection against balloon payments. That makes them an incredibly popular and desirable form of funding – but unsurprisingly, an incredibly difficult one to land.
The qualifying requirements are stringent, demanding high credit scores and proof of significant profit on the applicant’s tax returns. Furthermore, many entrepreneurs simply don’t have the time to wait out the long application process imposed by these types of loans. You’d also need to put up personal assets as collateral. But if you meet the requirements and are confident in your ability to adhere to the conditions, it’s certainly one of the best funding options. One important thing to note, however, is that you can’t use this type of loan to invest in real estate – only to start a real estate business.
Thanks to the JOBS (Jumpstart Our Business) Act that’s been passed in 2012, crowdfunding is a legitimate option in the real estate business – and it can be one that works very well for you. Real estate crowdfunding platforms make it incredibly convenient for investors, who can use them to find the available projects they’d like to participate in. The great thing about this system is that it gives investors the opportunity to finance shares of a chosen property at low cost, helping them diversify their portfolios much more easily. The real estate businesses that undertake the projects, on the other hand, also have a much wider array of financing options since they can get a number of investors financing the shares of each property. Once the project is completed, the investors collect the appropriate share of rent payments or profits.
The downside of real estate crowdfunding is that you can expect to wait a little longer to get an ROI, but this depends on the deal. Either way, an important factor to note is that the investor is the one who’s taking on the biggest risk in this scenario – if a project were to fail, the consequences fall upon them rather than the builder.
These are not all your options, of course, but rather a list of the most attractive ones in the modern market. Either way, we can’t stress enough what we’ve pointed out at the beginning of this post – make sure to do plenty of research. Don’t rush it. There’s no absolute best choice that’s going to suit everyone perfectly, and each funding method comes with its own set of advantages and disadvantages. What will work best for you really depends on your circumstances, so consider all the risks and take your time planning.