Think about the most popular and trendy way to raise money right now: crowdsourcing. People who want to write a book or who have a brilliant new app that they can’t get funding for make an appeal over the internet. Interested parties can invest in it, usually in return for copies of the final product. It’s fun and often very successful, but on the surface, it might not seem like it has much to do with real estate investing. However, when you think about equity-based financing – the kind that allows for hard money loans for the sharp real estate investor – the two function is very similar ways. For both means of funding, the most important factors are you and your vision.
How Equity-Based Financing Is Like Crowdfunding
Crowdfunding and equity-based financing are actually very similar. In crowdsourcing, you are appealing to investors based on your potential product and, more importantly, your talent. Sure, you could create an Indiegogo campaign to develop a car that runs on water, but if you lack a related background or any discernable scientific talent, it’s unlikely the campaign would draw many investors. Someone with a great background and proven talent, however, will probably attract a number of investors who recognize that talent and knowledge are the biggest assets to the campaign.
As a real estate investor, your talent is also in your possession. If you are a fix-and-flip investor, if you own a distressed property that you can improve, or if you’re looking at a ground-up construction project on a good piece of land, you have that “talent.” Your ability to renovate, build, and sell gives you the equity you need to secure a loan from non-traditional lenders, who are essentially partners in your future.
Equity-Based Financing: A Different Kind of Credit-Worthiness
One of the worries about buying a house for a fix-and-flip project is that you won’t have enough cash to properly complete the job. That can be a huge stress factor. After all, if you’re trying to improve a house by completing additions with a great ROI, like adding a new back deck, your investment can quickly turn into a money pit if you don’t have adequate financing. The problem is that many traditional lenders won’t help you out – maybe you have a bad credit history, or just have debt from purchasing. So how do you move forward with your project? That’s where equity-based financing comes in.
You have a great asset: the residential or commercial property you’re working on. A good equity-based lender will look at your credit and financial history, but that isn’t a driving factor in their decision. For a bank, however, that’s all there is. The driving factor for hard money lenders, on the other hand, is the potential success of the project. That’s based on several factors, such as neighborhood and scope, but the most important factor is the person in charge. They will take into account your abilities and your history with this kind of project.
Factors for Determining the Equity-Based Loan
The primary factors taken into account when determining an equity-based loan are:
- Neighborhood – Are you buying in an up-and-coming neighborhood, or in one that doesn’t seem like it will be rebuilt in the near future? This is a big factor in the potential success of the project.
- Value of the property – The property is essentially your collateral, so its value helps to determine the scope of your loan, as opposed to arbitrary credit scores.
- The project plan – Do you have a solid plan or a vague one? Do you have a plan that takes you from beginning to end with a clear path? Basically, it’s a question of whether or not you, the borrower, know what you’re doing. After all, this is an investment in you. That leads us to the most important factor…
- The person in charge – They will take into account your abilities and your history with this kind of project. You’re basically offering up your talent and drive as a way to get a loan.
That’s a whole new way to look at the notion of being credit-worthy. America, as a nation, is drowning in credit card debt, which makes the future feel hopeless for a lot of real estate investors. The traditional lending sources haven’t come around to the new reality that our equity, both in real terms and in the notion of what you can potentially accomplish, is the best way to analyze a project.
Think about it: with equity-based financing, you’re selling the idea of yourself. You have a plan and a way to accomplish it. You’re just short the cash. Equity-based financing looks at that plan and invests in you. And at the end of the day, isn’t that how it should be?
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.