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Raising Capital For Commercial Property Development

Raising capital for commercial property development can be a challenge for many new investors, but it is necessary for anyone looking to succeed in this sector. The key to raising capital for commercial property development is to focus on identifying what lenders want (usually a percentage of profit) and then to give it to them. If you succeed, there’s no reason you shouldn’t be able to raise the investment capital you need for your next project.

What Is Investment Capital?

Investment capital is the money used to fund a given investment deal. This can include the costs of acquiring a property, initial renovations, and upfront costs. There are generally two types of investment capital: debt and equity. Debt refers to investment capital from hard money lenders, such as banks, and often requires interest payments. An advantage of using debt investment capital is that hard money lenders will not have a say in the company. However, many investors may find it difficult to secure capital with hard money lenders. This is where equity comes in.

Equity refers to money secured by selling partial ownership of a property or business. Private investors or business angels may invest in a company if they see the potential to make a profit. Using equity as a form of investment capital has different pros and cons to utilising debts, so investors must consider both options. For entrepreneurs ready to put the work in, raising private money can offer the chance to pursue various investment opportunities and expand their portfolios.

Top Sources Of Private Money

Private money can be found all over the commercial property industry, but it may not be easy to identify if you don’t know what to look for. Here are some of the top sources of private money to be aware of:

What Are Money Partners?

Money partners are anyone you decide to work with to fund a given deal. When it comes to raising capital for commercial property development, money partners can be beneficial because they can enable investors without significant capital to get started. Money partners can finance a deal, provide advice, and even share a given investment risk depending on the arrangement at hand. Because of this, money partners are often highly sought after in the investment world. However, it is important to note that partnering with other investors is mutually beneficial. Business partners stand to benefit from the success of a good deal just as much as you do, something that is important to keep in mind as you get ready to approach potential lenders.

Money partners exist throughout the commercial property industry, though it is important to approach each potential investment carefully. It is not uncommon for even the most seasoned real estate investors to fail to close a deal with private money lenders or money partners. To ensure this does not happen to you, research potential investors you are trying to work with and put in the time and effort to ensure you are prepared every step of the way.

Uses For Private Money

Those who want to raise capital for commercial property most commonly use private money for refinancing or buying a new investment or owner-occupied property. For example, suppose you purchased a property using a conventional commercial mortgage but want to want to negotiate for a shorter repayment plan or lower interest rate. In that case, you can use a private money to help you purchase or refinance and lower the cost of the loan.

To get a private money for a new commercial investment property, you will have to pitch the potential profitability of the property with reliable numbers and predictions. Raising capital for real estate using private money is typically easier for experienced investors as they have track records of successful deals they have made.

How To Raise Capital For Real Estate

Private money funders will often have their own set of rules and guidelines. While many will exercise similar practices, their criteria are vastly different. However, there are several universal things private money funders look for.

If borrowers can identify what it is their business partners want, it’s more likely that they will receive the funding. Funders, whether it be debt or equity, are in the business of making money, too! There are six P’s that you can remember when it comes to private money funders. If you can give them the things outlines below, you could find yourself with the money needed to buy your next deal:

  1. Protect their capital
  2. Promise realistic returns
  3. Prove your potential
  4. Procure a great deal
  5. Provide your track record
  6. Promote relationship building
  1. Protect Their Capital

The primary concern investors have is protecting what they’ve loaned or invested. If they lose that, they won’t be able to profit, which is the whole point. That’s why so many business partners have recently invested in low-yielding commercial property-related products and ventures. When contemplating this factor, most look for collateral and how easy it will be to get their money back in the worst-case scenario. So be ready to answer these questions and have a plan B in your back pocket. The best way to work with a private money funder and raise the real estate investment capital you need for your next deal is to convince them that it’s worth their time because of the returns.

  1. Promise Realistic Returns

Where most property development investors go wrong when trying to raise capital is promising huge returns. If you sound overconfident, your presentation will automatically appear to be a “high-risk investment” or “scam,” which is certainly not the message you want to send.  You will have to be above average market rates, of course, but don’t project too high.  The last thing you want to do is overpromise and under-deliver.  Even if you think your goals are possible to achieve, start by underestimating and then deliver more later, which will create a sense of loyalty and reliability between you and your first line of business partners. If you tell them they will receive an ROI of 20 percent, and they actually make 25 percent after all is said and done, you can bet they’ll put you at the front of the line in their contact database and beg you to take their money for your next deal.

  1. Prove Your Potential

On the other hand, you need to make your investment sound appealing.  Savvy investors with bigger pockets and heavy-weight capital firms are, of course, intrigued by the promise of big wins. While keeping projections conservative, don’t be afraid to hint at the full upside potential – those big numbers you are hoping you’ll really hit.

  1. Procure A Great Deal

Everyone wants a “deal.” There are two reasons for this. The first is that it is simply human nature. If someone thinks they are getting a good deal on a product, it automatically gives the impression of value.  The second is that individuals and property lenders want to look smart and feel like they are making a sound investment. They all have someone they need to impress. It could be their boss, co-worker, competitor, or even themselves.  Regardless of who, your potential money partner will want to be able to boast about how intelligent they were to discover this high-yielding or trendy investment before everyone else. Help them out.

  1. Provide Your Track Record

Most investors expect to see a proven track record. They want to know that you can deliver on your plans. If you don’t have direct experience in commercial property development investing, what other relevant experience do you have or who else can you partner with?  Have your portfolio ready to go with your successes on top and which you can potentially leverage, if retained.  You’ve got to have the numbers to prove yourself.

  1. Promote Relationship Building

Surprisingly – or perhaps not so surprising – having a personal relationship between both investing parties trumps the rest of the qualifications.  So how can you build more authentic relationships or find like-minded individuals – whom you might already know – that might want to work with you? This is one of the most important habits to acquire as a real estate investor. Try attending a local networking event to get your face out there.  Building and maintaining relationships is necessary if you want to discover a potential money partner and achieve success.

Top Tips For Raising Capital For Commercial Property Development

The best advice for raising private capital in commercial property will vary depending on who you ask. This is because over time, investors find the way of doing things that work best for their commercial property businesses. However, this is not helpful to new starters. It takes time to develop a sure-fire system for raising private capital. In the meantime, here are some tips to help you:

  1. Use Your Own Money To Start With: Before you start fundraising for a new project, assess how much capital of your own you can rely on. Not only will this help you frame the budget for the project, but it will also lower the amount of cash you are paying interest on should you find an investor or lender. To increase your personal capital, consider redoing your monthly budget and reducing expenses for a while.
  2. Focus on Attention To Detail: The details included in your portfolio are going to make or break your pitch to private money lenders. Ensure you have an accurate purchase price, property value, refurb cost, and sale or rental value whichever applies but shows the exit for the investor/lender. If this is your first investment deal, make sure the figures and estimates in your pitch are as accurate as possible. Strong attention to detail could mean the difference between choosing a potential investment and securing enough financing.
  3. Showcase Your Success: When you complete a successful real estate deal, don’t be modest! Share the good news with your network, website, and social media following. Investors can and should showcase their successes (or wins) as they come along. This can help establish your credibility over time in the real estate industry when done right.
  4. Build Relationships: Networking is not as simple as exchanging business cards. If you want to have a successful career in property development, building relationships across the industry is crucial. Keep up with your connections, celebrate their successes, and check-in from time to time. Building genuine relationships will help your career more than you can imagine.
  5. Educate Others: Sometimes, you may encounter potential private lenders who are mostly unaware of the intricacies of a property development deal or the dynamics of private lending. It could be the perfect opportunity to educate someone else about what you do. As you build relationships with other commercial property professionals, have conversations about lending and acquiring deals, share the resources you find helpful, and put people in contact with one another when fitting. This will help you build relationships potentially introduce investors to a mutually beneficial real estate aspect.

Summary

Commercial property development can be a lucrative industry to be a part of but, as mentioned above, understanding the funding game and what different types of commercial lending is available is key to you being successful. Here at Pegasus Funding Solutions, we have years of experience working with property developers and commercial lenders. Talk to us today to discuss your next big commercial property development and see how we can tailor a financial solution to kick start your project.

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