This is the next post in our development overview series. Assuming that the idea passes due diligence with flying colors, then you will need to secure the funds necessary to complete the project. Before you approach investors, they will want to know the following:
Who you are and why should they invest ? Investors want to know if you are trustworthy and capable of completing a successful project
What is the project and why will it succeed? Succinctly explain the market demand for the product in your proposed location
Estimated schedule and return on investment - longer term investments will be considered higher risk and therefore will require higher returns.
What are the risks and how do you plan to minimize those risks? Risks could include entitlement, permitting, political, legal, financial, construction, sales and marketing, interest rate, etc…
Once you’ve sufficiently answered the above questions then you can approach the following groups of investors. For your first project, you should plan to raise sufficient funds to acquire the land and pay for everything needed until you’re ready for construction. Otherwise, you may not have sufficient funds to complete the project. Furthermore, you will most likely need to draw on multiple funding sources.
Friends & Family – This may be your easiest source of funding but typically raises the least amount of funds. We would also caution that the first project is most often the riskiest so be careful who you approach and how you disclose your project risks.
Networking – Reach out to your network and pitch your idea to high net worth individuals. The old adage is true: the more you do it the better you’ll become.
Investment Brokers – These are brokers who have access to high net worth individuals, institutional funds and banks. Furthermore they can help you market to the right funding source. As a result, you will pay them a fee. For funds under $1 million, you should expect to pay at least 5% in fees.
Crowd-sourced Funding – Crowd-sourced funding is a collection of funds from a large pool of backers, the crowd, and is usually connected through an online web platform. This option only became available to the real estate industry recently and appears to be gaining momentum.
Seller Financing – You may be able to entice landowners to agree to a long escrow, which will allow you to get the necessary approvals to proceed. A landowner may also be interested in becoming a partner in your project, which lowers your funding requirements.
Commercial Bank – You may be able to find a bank that will give you a loan to purchase the land for about half the appraised value though banks typically like to have a track record with you before they give land loans.
I know that is a lot and we haven’t even covered construction loans and personal guarantees. We will touch on that later.
As for us, we were fortunate to start out working with another developer that gave us valuable experience. Through that, we were able to establish ourselves and raise funds through a combination of friends & family, third party investors and an investment broker to complete Beethoven Four, our first project as The 4Corners Group.