If you intend to do some real estate development, getting the capital you need will be, perhaps, the most important aspect of your real estate endeavor. It is probably the most important factor that will decide whether your real estate project will end up as a success or failure. Even if you do not need to borrow money for your project, borrowing at least some of the cost of your development project would make a lot of financial sense. For this to succeed, however, you will have to know how to raise capital for real estate development.
The first thing you should know is that real estate investments, like all other investments, carry an element of risk, to a greater or smaller degree. It requires risk management, like every other business enterprise. However, it is that risk that allows the profit, or, in some cases, loss. If you are someone who doesn’t like risking, real estate development just might not be the thing for you. But, if you are not such a person and you do realize that risks have to be taken to make money, you should take them. You can, however, lessen those risks. To do that, you will have to familiarize yourself with some of the basic principles of raising the necessary capital, without risking too much.
Four basic rules you should consider before raising the capital
1. Work with experts
First and foremost, make sure you deal with people who have the experience and extensive knowledge. When it comes to real estate development, never invest in anything you do not fully understand. If you are a novice investor, there is a high probability you will make mistakes. Learning from them on your own can be quite costly and can completely ruin any chance of making profits. That is why you should surround yourself with experienced investors and developers. When asking for capital, almost every bank will insist that you have regular access to professionals such as Building Surveyors, Real Estate Agents, Structural Engineers, and Architects.
2. Do not borrow too much
Do not expect to get a big loan against your project. In most cases, banks will expect you to put up no less than 25 % of your combined total of development costs and initial project purchase. Also, do not forget to include a contingency fund, which is usually around 5 – 10% of the complete project cost figure. It would also be wise to possess a large enough starting capital, which will be used to finance the beginning stages of the individual build stages. This capital will have to last you until a bank releases the funds, according to a staged payment arrangement.
3. Avoid using a limited liability company
When starting out, make sure to avoid the services of Limited Liability Companies. The primary goal of these companies is to limit the potential personal risks of company owners. This is exactly what no bank would like to see. In the case of some problems, banks would rather be willing to closely work with you, to sort out these problems, instead of just enforcing the agreement covenants.
4. The importance of the CV
If you have a good record when it comes to real estate development, banks will be perfectly willing of giving you the capital. If you are new or have a rather poor record, they will hesitate. If you are a novice, make sure to start gaining experience by taking on lighter projects, such as redecorations or modernizations. Avoid any major rebuilding projects. It makes much more sense to start small and simple and then gradually proceed towards major projects.