Raising Capital: Beyond Private Lenders

Can the private lending concept be limiting to your real estate future? One could argue yes. While there is nothing wrong with private lending, as it is a starting point to understanding and utilizing private investment capital, I might suggest as a company grows there are better ways to use private capital.

First lets talk about what private lending is. In its simplest form it is one individual borrowing from another in a private, non commercialized transaction. If one is only doing a few real estate deals and has one or a couple of lenders, it is a simple inexpensive way to fund an investment. Usually at some point though a company's capital needs surpass what the few lenders can provide.

The Real Estate Fund

It can be called many things; real estate fund, private equity fund, syndication fund. With a fund you are simply putting together a group of investors to purchase a group of properties. It is essentially what the REITs and large private equity and hedge funds are already doing.

First, lets look at some advantages:

• By using more than one investor, you are able to raise more capital for larger projects.
• No more scrambling to find investors to fund that deal you have locked up. You have funds available ahead of time.
• Greater diversity for investors by spreading the risk across multiple properties.

There are also some disadvantages:

• Not something for a new or inexperienced investor.
• Higher start up costs. Legal, accounting, marketing.
• Greater fiduciary responsibility.

Might I say though, the private lending method does have the same disadvantages. For example, either way you need to be utilizing a qualified securities attorney to put the deal together and you must follow applicable state and federal securities laws. Typically this would be done under Reg D, Rule 506, but your securities attorney may have a better option for you depending on your state and situation.

Now what can the funds be used for? Single or multifamily properties, manufactured housing communities, self storage, office buildings, retail or any other use, though you may want to stick to a particular asset class for each fund. Create one fund to invest in apartment communities and a different one for office buildings. You can also structure your fund for short term fix and flip projects or long term buy and hold.

In conclusion, if your private lending model is working for you, there is no need to change it. But, if it has been limiting to your investment success, consider an investment fund. It may be just the thing your investors are looking for.