Things to Consider When Financing Real Estate Development
Real estate development financing is no easy feat. Oftentimes, companies resort to seeking investors who will be able to fund their projects and who will be most amenable to their offered terms when it comes to returns and partnership.
However, with the huge number of investment opportunities available, investors may become choosy and indecisive. It is then very important to hook your investors in such a manner that they do not remain as mere window shoppers eyeing your investment offer but actually become buyers and stakeholders.
If your project is in commercial real estate, things may get a bit more pressured than when you are starting up another business. This is because real estate developers are tasked with making sure that all payables including debt and equity capital are settled even before beginning the project itself, while other entrepreneurs can simply accept funding throughout the business’ period of existence and growth.
This means that real estate development financing requires its sponsors to be able to raise large sums in the least amount of time from numerous sources. They are able to do this by packaging the investment into a comprehensive bundle so as to make the offers uniform and easy to handle and purchase.
However, this convenience is not all there is to it when it comes to a pre-packaged investment deal. What is more important for investors is the manner in which the investment’s value is demonstrated.
Below are some of the sought-after characteristics that will help you attract investors to your cause to achieve adequate real estate development financing:
Transparency
Legally speaking, a real estate project sponsor is bound to disclose any risk that may be involved in the project, should the investors opt to buy into their project. They are sure to face legal charges if they fail to do so.
Accounting for and disclosing the risk can help your investors make a decision about whether or not the amount of risk is fit for their risk appetite. There are two contrasting risk appetites: high risk appetite and low. Most people fall somewhere in between.
To provide your target audience with the risk profile, offers often contain a vast amount of information on a project’s feasibility and the amount of risks involved. Being honest and upfront about this detail can help keep your investors happy and help keep you out of lawsuits.
ROI Details
Just look at the original reason why investors do what they do – they want to earn money by making their money work for them. Most of the time, investors are on the risk-averse side and would want consistent returns with high predictability.
Including this in your portfolio (if it is applicable) may be an attractive bait to turn potential customers into full-fledged investors.
However, as with any investment, predictability is often not 100%, which is most likely why project holders do not commonly make these types of offers.
Planning
Real estate development takes a lot of thinking over, not to mention planning. That is why real estate development financing also takes a lot of planning.
To be able to grasp the importance of this concept, imagine becoming an investor. Would you rather invest in a project that has specific plans or one without? A properly planned project will be able to get through the permits and loan applications and investments.
Although it is not easy to lay out a detailed business plan way before starting the business itself, it pays to draft out the project timelines and other possible details since it will reassure your investors that their investment really does have somewhere to go to.
Proactive
Real estate development financing requires that a project’s sponsor will be able to highlight and showcase its team in a light that will focus on their past successes and high batting-rate average.
Being able to show yourself as a company and as a team of competent people that are capable of yielding great returns will attract investors to your cause.
