Commercial real estate investments can be incredibly lucrative, but raising the capital needed in the first place is a big barrier to entry. Commercial investments are more costly than residential real estate, so even if you already have a healthy portfolio, you may find that you are unable to invest in commercial properties without some outside investment.
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If you want to move into the world of commercial real estate, it’s important that you know how to raise the necessary capital. Before you get started, make sure that you do your research and you understand the unique challenges presented by commercial real estate investments. If you still think it’s right for you, this guide will tell you everything you need to know about raising capital for commercial real estate investments.
Deciding Whether You Need Outside Investment
Firstly, you need to consider whether you really need outside investment or not. As soon as you bring other people in on the deal and take their money, they have a vested interest. That means that they have a say in how the investment is handled and if you have different ideas about how things should be done, it can lead to a lot of problems.
In some cases, you may be able to sell off an old investment to raise the capital. Funding the entire project yourself gives you a lot more freedom and flexibility but it is not always an option.
You should also consider the added cost of finding outside investment because the investors will own a significant share of the equity in the deal. If you simply borrow the money and they do not own a portion of the property, you will have to pay interest. Ultimately, this means that your profits are lower when taking outside investment.
On the other hand, bringing investors on board does mean that you can get involved with commercial real estate opportunities that you would not otherwise have been able to afford. If you are looking to grow your real estate portfolio, this is a big benefit.
Consider your investment goals and your current financial situation and think carefully before deciding to take outside investment.
Commercial Real Estate Investment Structures
If you do decide to bring other investors on board, there are a number of different ways to do it. You need to consider each option carefully when deciding which is right for you.
Real estate crowdfunding
In recent years, crowdfunding has taken off in a big way and many people are starting to crowdfund real estate investments. Platforms like Fundrise are becoming increasingly popular for people that want to invest in real estate but don’t have the capital to do so. It gives you the option to put in a small investment with a large group of other investors. If you are finding it difficult to raise the money that you need, you should consider investing in a crowdfunded project instead. You can still reap the rewards of a commercial real estate investment but you don’t have to manage the project. Alternatively, you could see if you can crowdfund the money needed for a project of your own.
Limited liability companies
An LLC is one of the most common deal structures for commercial real estate investments. The property is owned by the company and all investors own a share in the company. This is a good option for investing with a small group because it gives you good protection. If the property investment goes bad, it is separated from your other investments and won’t drag them down.
Limited partnerships
In a limited partnership, there are general partners and limited partners. The general partners will operate and manage the investment while the limited partners simply provide capital. This is a good option if you need money but you still want to maintain control over the investment.
Joint ventures
In a joint venture, two or more entities own the commercial property together. This means that everybody involved has an active part in managing the investment and making decisions. In some cases, this works, but be careful about who you enter into a joint venture with because it can lead to conflict.
Compiling Your Pitch
Once you have decided on a deal structure, it’s time to put a pitch together and start approaching investors. It’s important that your pitch includes these crucial details:
- Details of the property and your investment goals
- The potential risks involved
- The terms of the investment
- Any other parties involved
- Financial information
If you are to convince investors that they should part with their money, it’s important to provide as much detail as possible and be prepared to answer a lot of questions.
As long as you choose the right deal structure and put together a winning pitch, you will get the investment you need to start your new commercial real estate investment journey.