Discover the Sources of Capital to Invest in Real Estate

For potential investors, it can be daunting to figure out where to find the capital to invest. I remember the first syndication I invested in, the minimum investment was $50,000, and I was like “where the heck do I find that?”

It can be overwhelming trying to answer that question which is why most potential investors do not end up investing when there is a great opportunity in front of them.

Let us explore the solutions together, ensuring you seize every opportunity that comes your way.

The Sources of Capital

1. Personal Savings and Liquid Assets:

One of the most straightforward sources of capital for investing is your personal savings and other liquid assets. This includes funds from your savings accounts, money market accounts, or other investments that can be easily converted into cash. Assess your financial situation and determine how much capital you can allocate towards investing while still maintaining an appropriate level of liquidity for your needs.

For my family and I, we determined we would have three months of expenses covered in an emergency fund and all other cash can be invested. It took a lifestyle change and years of saving/investing before we got to that point.

2. Self-Directed IRA’s (SDIRA) and Solo 401(k)’s:

SDIRA’s and Solo 401(k)’s offer another avenue for acquiring capital to invest passively in a real estate deal. By transferring or rolling over your retirement funds into a seld-directed account, you gain the flexibility to invest in assets such as real estate. Engage with a reputable custodian experienced in self-directed accounts who can guide you through the process, ensuring compliance with IRS regulations and maximizing tax advantages associated with these accounts. Click here to go into more depth on this option.

After reading “Killing Sacred Cows” by Garrett B. Gunderson, we decided to cash out our Roth IRA, take the penalty, and pay the tax on the capital gains because we knew we would far surpass the amount paid from the returns on the investment.

I don’t recommend this unless you have done a thorough financial evaluation of your situation, talked to your tax professional to see what tax liability you would owe, and you are savvy with analyzing a multifamily opportunity to ensure it makes sense financially.

3. Real Estate Partnerships:

Forming partnerships with other investors who have a similar interest in syndication deals can unlock additional capital sources. Seek out like-minded individuals who are willing to pool their capital and invest collectively in syndications.

For example, if the minimum investment is $50,000 but you only have $15,000 to invest, you can form an LLC with others who also want to invest and are able to collectively come up with the additional $35,000. Then as a partnership, you invest that LLC into the syndication for the total of $50,000 or more, depending on if the partners want to invest more.

After cashing out my Roth IRA, some other investors who saw the deal as a great opportunity wanted to invest in it as well. Since I was the only one who had the pre-existing relationship with the sponsor, they wouldn’t have been able to invest. So we formed an LLC, pooled together our investment capital, and invested the LLC into the multifamily deal. Our percentage of ownership was equal to the percentage of contributed capital.

With this option, make sure to consult with a legal professional who specializes in business entity formation to ensure the terms, agreement, and responsibilities between the partners are fully understood.

4. Home Equity:

If you own a property with significant equity, tapping into your home equity can provide a substantial source of capital for investing. Home equity loans or lines of credit (HELOC) allows you to borrow against the value of your property, providing you with access to additional funds. Before jumping right into this, make sure to evaluate the terms and interest rates associated with these options, ensuring that the potential returns from syndication deals outweigh the costs of borrowing against your home equity.

For a new investor, finding the capital to invest can be difficult to see upfront. By exploring the options listed above, you may be able to find a solution so you can take advantage of a great opportunity when it presents itself.

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