Access to capital is an ever-present challenge for small, non-institutional real estate investors. There are high barriers to entry for these investors when traditional lenders are sought. These lenders require a high W-2 wage, substantial down payments, high liquidity ratios, and onerous documentation.
Real estate investors must also face the fact that traditional lending sources will not lend on unstable properties regardless of the borrower’s qualifications. Hence, we like to offer alternatives to non-institutional investors to pool resources on the equity side and qualify for a loan with a private lender.
Alternative Financing Strategies
Many small investors need to pool resources through non-conventional methods before the economies of scale are present in their portfolios. Whether the objective is the short-term fix-and-flip or the long-term buy-and-hold, investors implementing either model must have sufficient liquidity and know how to accumulate wealth before significant profits are realized.
The alternative methods include:
- pooling resources through joint ventures or crowdfunding, or
- collaborating with peers, and
- building a relationship with a private lender.
1. Pooling Resources through Joint Ventures or Crowdfunding
Small investors should take advantage of the opportunities found in the joint venture or the crowdfunding structures. These methods match private funds on the equity side with investors on a project-by-project basis. Whether these partners are silent or are willing to actively partner with an investor, the investor will benefit from shared responsibilities, access to larger investments, and leveraged experience.
This private capital can be accessed through online forums or networking in the local investment market.
2. Collaborating with Peers
It is the best strategy for small investors to partner with their peers. These like-minded partners will work toward a common goal without the added work of establishing a relationship.
However, some investors without this resource need to approach peer-to-peer lending platforms. The same benefits of flexible terms and quick access to funds are offered, but the fees on these platforms can be as high as 8%. This origination fee is paid upfront or deducted from the sourced funds before distribution.
Investors must proceed cautiously and understand their due diligence results before agreeing to participate in a peer-to-peer platform.
3. Relationship with a Private Lender
Although this article focuses on the equity side, the place for all investors to begin is with the relationship with a private lender. Private lenders target the value-add opportunities to create value through renovation. The loans to finance the acquisition and renovation scope are the same for the short- or long-term hold. The difference from a lending perspective is the payoff, either by sale or refinance.
When an investor begins with the private lender, the investor will know the amount of equity needed to close the transaction and meet the lender’s liquidity requirements post-closing.
Although it does seem counterintuitive to begin with the debt side, private lenders evaluate deals on a case-by-case basis. Each deal will have circumstances for the lender to underwrite for the offered loan-to-value ratio and risk tolerances to measure for the offered rate.
It will be an easier sell for the investor when potential partners are approached with the complete deal structure and a stated amount of equity required by the lender willing to loan on the deal.
For investors with the long-term hold objective, most private lenders can provide loan structures for long-term permanent money when the property stabilizes.
The strategies of pooling and collaborating with partners will aid the small investor to qualify for financing early in their investment journey. However, the relationship with a private lender before any collaboration will support and quantify the investor’s plan when presented to potential partners.
If you are a real estate investor looking to pool resources or collaborate for equity funds, you must work with a reputable and experienced hard money lender in Los Angeles. PB Financial Group is a premier, direct hard-money and bridge lender that has provided quick funding since 2007 and closed over 2,700 loans. We aim to satisfy your financing needs efficiently.