Capital raising in real estate refers to the process of sourcing funds to finance property development, acquisition, or renovation projects. These funds can be raised through various channels, including but not limited to, banks, private investors, real estate investment trusts (REITs), and crowdfunding platforms. The capital raised can be used for buying properties, renovating existing ones, or developing new projects.
The capital raising process is often a crucial aspect of real estate investment, as it allows businesses to leverage other people’s money to finance larger projects than they could afford on their own. The terms of the capital raised, such as interest rates and repayment schedules, are usually defined in the initial agreement between the borrower and the lender.
While both capital raising and syndication are strategies used in real estate to generate funding for investments, they are not the same thing. Capital raising refers to the process of sourcing funds for property investments from various channels. It’s a broad concept that can take on many forms, such as bank loans, private equity, crowdfunding, and more.
Syndication, on the other hand, is a more specific form of capital raising. In a real estate syndication, an individual or group of individuals (the syndicator, GP, or sponsor) will bring together multiple investors to pool their resources to fund a real estate project that would be too expensive for any single investor to finance alone. The syndicator typically manages the investment, while the other investors provide the majority of the capital.
So, in essence, syndication is one of many strategies used in the broader process of capital raising.
Here’s a simplified four-step overview of the capital raising process in commercial real estate. Remember that raising capital for commercial real estate projects requires thorough planning, a compelling investment proposal, and compliance with financial regulations. Each of these steps can take a significant amount of time and expertise to execute properly.
Project Evaluation & Business Plan Development: The first step in raising capital for a commercial real estate project is identifying a viable investment opportunity. This involves evaluating the market, assessing potential returns, understanding the risks, and determining the capital needed. Once the project is identified, you will need to develop a comprehensive business plan that outlines the project’s objectives, timeline, financial projections, exit strategies, and risks.
Investment Structuring: In this step, you decide how the investment will be structured, i.e., the terms and conditions of the investment opportunity. This includes determining the type of financing (equity, debt, or a combination), the terms of the investment (such as preferred returns, profit splits, etc.), and the legal structure of the investment (often through an LLC or a Limited Partnership).
Investor Outreach & Networking: Once you’ve developed a business plan and structured the investment, the next step is to reach out to potential investors. This can include a wide range of individuals and organizations, from friends and family to private equity firms, institutional investors, and crowdfunding platforms. It’s essential to present a compelling investment proposal and be prepared to answer detailed questions about the project.
Deal Closure & Funds Management: After you’ve identified interested investors and negotiated terms, the final step is to close the deal. This usually involves signing legal documents and transferring funds. Once the capital is raised, it’s crucial to manage the funds effectively and according to the business plan, regularly communicating with investors about the project’s progress until the exit strategy is executed.
General Partners (GPs), or syndicators, play a key role in real estate syndications, and there are several best practices they should follow to ensure a successful capital raising process. Remember, real estate syndication requires expertise, diligence, and strong relationship-building skills. By following these best practices, GPs can increase their chances of successfully raising capital for commercial real estate projects.
Understand the Market: GPs should have a deep understanding of the real estate market, including current trends, local property values, rental rates, and economic indicators. This knowledge is crucial for identifying promising investment opportunities and making accurate financial projections.
Perform Thorough Due Diligence: Before presenting an investment opportunity to potential investors, GPs must perform rigorous due diligence. This includes verifying the property’s condition, analyzing its financial performance, understanding its competitive positioning, and assessing potential risks. Due diligence can help avoid unforeseen issues that could negatively impact the investment’s returns.
Develop a Comprehensive Business Plan: A detailed business plan is crucial for convincing investors to participate in a syndication. The business plan should outline the investment strategy, projected returns, exit strategy, risks, and how the GP plans to manage the property. Transparency and detail are key to building trust with investors.
Establish a Strong Network: Building relationships with potential investors, lenders, real estate brokers, and other industry professionals can greatly facilitate the capital raising process. A strong network can provide access to more investment opportunities, capital sources, and valuable advice.
Comply with Legal and Regulatory Requirements: Real estate syndications are subject to numerous legal and regulatory requirements. GPs should work with a knowledgeable real estate attorney to ensure compliance with all relevant laws and regulations, including securities laws. Non-compliance can lead to legal trouble and damage the GP’s reputation.
Mistakes to Avoid
Not Using Secure and Compliant Platforms: When handling sensitive data such as personal information and transaction details, it’s critical to use secure and compliant software or platforms. Failure to ensure data security can lead to breaches, potentially resulting in significant financial and reputational damage.
Improper Tracking of Funds: Once an investment is received, it’s vital to keep detailed records of how these funds are being used. Mistakes in tracking or reporting can lead to confusion or even accusations of mismanagement. Implementing robust accounting and bookkeeping systems, ideally using specialized real estate investment software, can help avoid these issues.
Delayed or Incorrect Payments: Timely and accurate distribution payments to investors is crucial. Mistakes or delays in payments can damage the trust relationship between the GP and investors. Automation and use of secure payment platforms can help streamline this process, ensuring accuracy and punctuality.
Capital raising software can automate many tasks associated with fundraising, like tracking investments, managing investor relations, and even profit distribution with integrated banking. This automation saves time and reduces the likelihood of errors.
Capital raising software can help manage investor relationships more effectively. It can track investor information, communication history, and investment status, making it easier to keep stakeholders informed and engaged.
It’s important for GPs to ensure that any software they choose suits their specific needs and complies with all applicable laws and regulations.
Capital raising software often provides secure, centralized storage for important documents, such as investment agreements, due diligence materials, and financial reports. This facilitates easy sharing with potential investors and team members while maintaining high security standards.
“Before Covercy it felt like we were an accounting firm – that all we were doing was constantly making payments and dealing with bureaucracy, leaving us no time to truly grow our assets and portfolio. It was a colossal waste of time and energy.”
Covercy is the first real estate syndication platform where banking meets investment management. Save time with our automated distribution & capital call payment processing, gain your LPs’ trust with our intuitive Investor Portal, and generate interest from capital funds held in your Covercy Wallet – all in one platform.
Covercy is not a bank. Banking provided by Choice Financial Group; Member FDIC. Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category. The APYs presented here are indicative as of July 26, 2023 and fluctuate as the interest rate changes
The Currency Cloud Limited (Non MIFID related products). Registered in England No. 06323311. Registered Office: Stewardship Building 1st Floor, 12 Steward Street London E1 6FQ. The Currency Cloud Limited is authorized by the Financial Conduct Authority under the Electronic Money Regulations 2011 for the issuing of electronic money (FRN: 900199)
Covercy Europe Limited. Registered in England No. 675000. Registered Office: 5 Elstree Gate, Elstree Way, Borehamwood, Hertforshire, WD6 1JD, UK
Covercy Technological Trading Limited. Registered in Israel No. 57797. Registered Office: 3 Ha-Yetsira St, Ramat Gan 5252141.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
Essential Website Cookies
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
Other external services
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.
Google Webfont Settings:
Google Map Settings:
Google reCaptcha Settings:
Vimeo and Youtube video embeds: