If you are a real estate sponsor with experience handling smaller projects, but you’re ready to move up to the next level, you likely have many questions about how to raise capital for larger investments. Moving into the mid-market segment offers many lucrative upsides. However, there are considerations for choosing the appropriate funding sources. Understanding the available options can help you decide on the best approach for your project.
Understanding the Funding Avenues To Raise Capital
When you are ready to raise $5 million in capital for your next real estate project, there are several investment strategies available to you. As a sponsor, you’ll naturally want to increase profits while minimizing risk. Each avenue for funding has its own benefits and risks. However, having options gives you greater flexibility in diversifying your investments and mitigating risk during times of inflation and high interest.
Pure Equity vs Equity-Debt Combo
Equity financing lets you trade shares of the assets in the form of stock. The allure of this method is that there is no interest charged on the funds or any obligation to repay the investment. The potential downside is that someone else now owns a portion of the assets. That also means you have handed over a commensurate amount of control.
Debt financing is a more traditional method to raise capital for real estate. You take on a financial obligation to repay the investment with interest. Equity-debt combo financing allows you to mitigate debt obligations and maximize ownership with other financing options such as crowdfunding equity investments.
Some of the key operational and result metrics used to assess such deals include:
- 1. Cap Rate (CR)
- 2. Cash on Cash (CoC)
- 3. Cash Flow
- 4. Debt Service Coverage Ratio (DSCR)
- 5. Equity Multiple (EM)
Depending upon the type of properties and your chosen financing strategy, other metrics can be extremely important, such as loan-to-value ratio, internal rate of return, operating expense ratio, present value, and holding period return, among others. It is best to protect yourself in these deals by choosing a platform that can vet opportunities, sponsors, and investors to arrive at the most mutually beneficial arrangement.
Accredited vs Non-Accredited Investors
Many sponsors ask about the benefits of accredited vs non-accredited investors when trying to raise capital. Accredited investors must meet at least one of two criteria. They must have at least $1 million in net worth, excluding their primary residence, or meet income criteria. If an individual makes $200,000 or a couple has $300,000 in combined income over the last two years, they may qualify as accredited investors.
Non-accredited investors can still provide a way to raise needed funds for real estate. As a sponsor, you’ll have more small passive investors with a minimal ownership stake, giving you a larger potential pool for your next project. A potential downside is the challenges of communicating with and answering to a large number of investors. Many sponsors choose to combine their equity financing strategy by balancing accredited investors and crowdfunding.
Making Your Pitch
When it comes time to raise capital for your project, you’ll need to prepare your pitch. Investors want to hear your value proposition before handing over their money. That means delivering a compelling argument for the opportunity and presenting the accompanying visuals. You’ll want to carefully consider not only the contents of your pitch deck but your design.
There is a delicate balance between giving the right amount of information in slides to adequately portray the opportunity without losing your audience in too much verbiage. That means having the right number of slides with the most critical information. The most basic details include your company name with contact instructions, a photo and description of the concept to set the stage, and the problem you are trying to solve.
In your description of the solution that your project delivers, you will also need to provide some other pertinent details, such as market size, the competition, your competitive advantage, as well as features and benefits. Describing your business model, financial forecast, and other investors in the project may also help to make your proposal more attractive to new investors.
Opting for Funding Portals Over Traditional Finance Methods
Funding portals have several differences from traditional financing. First, traditional financing typically comes in the form of conventional loans, private money loans, or a limited liability company (LLC) that sells shares to investors for equity. Funding portals, on the other hand, raise money through crowdfunding where several smaller investors who wouldn’t normally partake in investment deals that require accredited investors can acquire equity in real estate opportunities. These funding portals are accountable to the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Choosing the Right Portal To Raise Capital
Funding portals such as RealtySlices are an excellent option for raising funds. RealtySlices makes investing simple and accessible for a wide variety of potential investors without charge. The SEC-compliant offerings are blockchain-secured for an additional level of trust. For sponsors, that means immediate access to a large group of real estate investors that meet even the most stringent criteria.
At RealtySlices, we not only provide transparency, convenience, and carefully screened opportunities for investors but also the ability for those sponsors who meet our requirements to raise capital. We perform a background check that encompasses financial, legal, and professional history. We carefully vet our sponsors’ track records, including how transparent they are in describing the opportunities, the timeliness of communications to investors, and compliance with all regulatory filing requirements. We also look at past performance and how the sponsors have come through on their promises to investors.
If you are a sponsor with at least three years of real estate development and operational experience providing an IRR in the double-digits and you need to raise capital of at least $5 million, RealtySlices LLC may be the right option for you. Let’s start a conversation about your project and your investor criteria so that we can get you on your way to your next successful real estate venture.
Sources:
https://corporatefinanceinstitute.com/resources/commercial-lending/debt-vs-equity/
https://www.thebalancemoney.com/non-accredited-investor-5208256
https://www.realtyslices.com/resources/why-real-estate-investing
https://www.realtyslices.com/blogs/real-estate-metrics-that-matter