Finding a good property concept is only half the battle. To get plans turned into permits, footings, walls, and completed commercial space, developers must have funding available to finance their development concept. As such, obtaining real estate investment capital can be one of the most important tasks in bringing a development concept to life.
The problem is that investors and lenders do not want an interesting concept. What they are looking for is an understanding of what the concept entails, its risks, the figures, the players behind the concept, and the strategy for creating value.
Start With a Clear Investment Story
Don’t even think about approaching investors until you can tell your story without a twenty-page presentation.
- What are you building?
- Where will it be located?
- Who will use it?
- Why does the market need it?
- How much will it cost?
- How will the property generate revenue?
- What happens when construction is complete?
Unless you have all these questions answered, it is going to be very difficult to get the point across.
An investment story doesn’t require exaggerations; it requires logical flow between the market, the property, the figures, and the expected result.
Know Your Numbers
You do not have to predict the future. You do need to know your assumptions.
Developers pursuing real estate investment capital need to know their acquisition costs, construction costs, professional fees, financing costs, operating assumptions, contingencies, and revenue figures.
With a c-store or fueling station, for instance, the financial aspects might consist of such things as land cost, site development, construction of the facility, fueling infrastructure, equipment, signs, permitting, financing, and startup costs.
The more that the various elements are defined, the easier it is for a prospective funding partner to assess the project.
Build a Realistic Development Budget
A development budget is not meant to minimize costs but rather to explain them. Budgets should contain a contingency factor.
It is a given that construction does not always proceed smoothly, and investors understand this.
Not having a contingency factor in your budget could, in fact, create a number of issues rather than resolve them.
Understand Different Sources of Capital
There isn’t one universal source of development funding.
Depending on the project, developers may consider bank financing, private investors, joint ventures, institutional capital, equity partners, construction financing, or combinations of these options. Every funding source brings its own set of criteria.
A lender, for instance, will look at the capacity to pay back the debt and the security for it, among other things. The equity investor might be more concerned with the future prospects of the project. These considerations help you know who to target.
Your Team Is Part of the Investment
Investors don’t invest only in buildings. They invest in people who are expected to execute the plan. That means the development team matters.
An excellent team might consist of seasoned developers, architects, engineers, construction professionals, lawyers, finance experts, and property managers.
An established construction partner would also add value to the project, since investors would want to be assured that the budget and schedule have been formulated taking into account realistic construction issues.
This is particularly important for specialized developments.
Location Needs More Than a Pin on a Map
The location of a project needs to be justified with a solid market rationale.
In the case of a commercial venture, such considerations as traffic, demographics, other local companies, competition, accessibility, visibility, future development potential, and clientele needs must be taken into account.
Take a gas station, for instance—it0 relies mostly on traffic and accessibility. A C-store could have an advantage of residential growth nearby, office space, or high traffic volume.
This does not mean that you should choose an impressive location. This means that you should justify why you have chosen this particular location for your business.
Prepare for Questions
A serious investor will ask difficult questions.
- What happens if construction costs rise?
- What if the project takes longer?
- What happens if leasing takes time?
- What assumptions are most sensitive?
- What is the exit strategy?
- What happens if the market changes?
This is not an indication that the investor finds your project unappealing. This is an indication that the investor does his or her job. Be ready to give honest answers.
If you do not know something, just admit it and explain how you are going to find out the answer.
Don’t Hide the Risks
Every investment has risk.
Stating a project as being completely risk-free will actually make its presentation weaker.
Rather, mention the risks present in the project and how these risks will be handled using specific strategies.
For instance, a development team can mitigate the risk involved in a construction process using strategies such as thorough planning, experienced construction companies, contingencies, procurement planning, and continuous project monitoring.
This approach is much better compared to simply saying, “There is no major risk.”
Think Beyond Construction
Investors want to know what happens after the building is completed.
- Will it generate rental income?
- Will it be sold?
- Will it operate as a business?
- Will the property be refinanced?
- Will it become part of a longer-term portfolio?
The funding strategy should connect with the property’s eventual purpose.
A construction budget without an operating or exit strategy is only part of the story.
Build Relationships Before You Need Money
Developing investor relations even before the time you need them is perhaps the best thing a developer can do.
You should attend various industry events. You should develop professional relationships. Always inform potential investors of opportunities you have. Develop relationships with your lenders and other advisers.
In this case, when the right development opportunity arrives, you will not be at square one.
Real estate investment capital is not about sending an email to a perfect investor once only.
This term means money from investors or financial partners in acquiring, developing, improving, or operating real estate ventures.
Frequently Asked Questions
What is real estate investment capital?
It means funds offered by investors or financing parties for the purpose of buying, developing, improving, or managing real estate projects.
What do investors look for before funding a project?
Typically, these include the project location, demand in the marketplace, financial projections, project development team, building plan, risk assessment, projected profitability, and how to get out of the deal.
Can a construction company help attract investors?
A skilled building partner can contribute to improving the development plan through construction experience, budgeting, scheduling skills, and project management.
How much capital should a developer raise?
The size will be determined by the total project budget, financing plans, need for contingency, and developer’s equity contribution. A detailed financial model should determine the requirement.
Is private investment better than traditional financing?
There is no right or wrong choice here. It all depends on various factors, including the project, financial structure, risks, time frames, etc.