How to Raise Capital in Real Estate Interview with CEO of The King Khan Group, Fasil Khan.
Since Real Estate is so wide and broad, you need to identify what type of investment you are seeking. This requires getting into a focused mindset with clarity on your goals.
What investment strategy do you want to focus on?
What do you want to specialize in?
As Fasil shares in our interview episode “How to Raise Capital in Real Estate”, there are 3 Vehicles of Real Estate Investment:
Buy & Hold
Buy & Hold
Buy and hold real estate is a long term investment strategy, where an investor purchases a property and holds on to it for an extended period. The owner may have the intent to sell it down the line, but will usually rent out the property to help with buy and hold real estate financing.
When you purchase a property to hold, there are two ways to fund the purchase. You can either pay cash, which will provide immediate cash flow. Or, you can secure a mortgage or other financing, which will allow you to acquire properties even if you don’t have the full cash amount to buy.
Types of buy-and-hold real estate investing strategies include investing in:
- Turnkey real estate: Purchase a move in ready property outside of your neighborhood that usually comes with tenants and a property management company in place
- Vacation rental property: Invest in a vacation property that offsets some of the costs of home ownership by bringing in rental income
- Multifamily property: Purchase a property with 2-4+ units and rent it out for rental income
- Apartment building: Purchase a property that typically has 5+ units and creates monthly rental income and other income like vending and parking revenue
- Commercial real estate: Purchase a property that is used for business purposes like an office building, retail store or hotel
- Buy and hold real estate is a long term investing strategy with a unique set of advantages.
- To get started, investors should mind their due diligence and devise a business strategy.
- Long term rental properties can transform your portfolio in a positive way.
- Increase Cash Flow
- Tax Benefits as a Rental Property
Buy And Hold Real Estate Calculator
Investors considering a buy and hold real estate strategy should mind their due diligence by calculating the potential income to be generated by renting out the property. The bottom line here is that the monthly revenue should exceed monthly expenses specific to the property, such as mortgage payments, interest, taxes, fees, and maintenance costs. In addition, if the investor plans to sell the property down the line, the potential profit should also be considered. Finally, the cost of taking out buy and hold real estate loans or other types of buy and hold real estate financing must be factored in. For assistance in making these calculations, simply use a buy and hold real estate calculator such as the one on Calculator.net.
Fasil covered 2 distinct focuses that he engages in when house flipping:
Take undervalue home at 65% – 70% and upgrading the home – remodeling and placing it back into the market for a markup.
Due to the nature of house flipping, investors need to obtain funds as fast as possible to maximize profits—which is why private money has become such a valuable option for investors who are looking to raise capital quickly.
Raising private money is not simple like what you see on TV. But with the right knowledge, it’s totally possible for you to make a huge profit.
How, exactly, does a syndicated deal work? Real estate syndication is a simple transaction between a Sponsor and a group of investors.
You know how when two guys open up a pizza restaurant together, one has more money to invest and the other has a lot of experience working in and managing businesses? The guy with the business experience (the Sponsor) finds a pizza restaurant to open and arranges everything, while the other guy (the investor) simply invests his money. The guy with the business experience naturally runs the pizza restaurant, and, as a result, gets a paycheck for his work. Both get a share of the profits based on time and money invested.
Real estate syndication is an effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own.
The basics of real estate syndication aren’t all that different from two guys opening a pizza restaurant together. As the manager and operator of the deal, the Sponsor invests the sweat equity, including scouting out the property, raising funds and acquiring and managing the investment property’s day-to-day operations, while the investors provide most of the financial equity.
Real Estate Syndication Statistics
- In 2012, over 47,000 investors participated in syndications.
- The average size of a real estate offering was 2.3 million.
- Passive investors came up with 80-95% of the initial capital investment
- Sponsors came up with 5-20% of the initial capital investment
- Investors received a preferred return ranging from 5-10%.
- The average preferred return was 8%.
- Sponsors netted an acquisition fee of .5 to 2%. The average acquisition fee was 1%.
- Sponsors netted a property management fee between 2 and 9%.
While raising private money is challenging and requires experience and proper guidance, it boils down to two things. First, know your business, then market yourself all the time. Second, know what the lenders want and provide it to them. Focus on learning these fundamentals will dramatically increase the chance of you getting an investment.
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