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It used to be that there was one basic way to finance any real estate project: running to the bank. Today, there are more flexible options, making the traditional route just one of a few alternatives. Here’s an overview of some of the choices you have to fund your real estate project today:
- 1031 Exchange
A 1031 exchange lets you flip a lower-value property to fund a higher one, deferring capital gains and giving you liquidity that you can invest in the higher-value property. These kinds of exchanges are sometimes known as “like-kind” exchanges. Because there’s a 45-day time limit for 1031 exchanges, a few platforms have emerged to facilitate this process online. However, due to the complexity and fine print, most property owners can’t realistically leverage this loophole.
- Hard Money Loans
Hard money loans are an age-old option if the level of risk is unacceptable for banks or traditional lenders. However, these come with high interest rates and are generally only available for short-term lending. They may be a reasonable alternative for fast funds, especially if there’s a higher credit risk, but the interest rates make these loans unattractive for larger sums and longer-term fundraising.
- Real Estate Investment Trusts
One of the most popular ways to raise funds is a real estate investment trust, or REIT. Big investors appreciate REITs because there’s a lot of oversight and security; however, smaller investors are usually barred from participating. And there may be numerous obstacles in the way if you’re looking at an REIT to raise funds, including the level of reporting required along with the high taxes generally charged on dividends. You’ll also be giving up a huge stake in ongoing income.
- Partnership Option
The partnership or angel investor option lets you tap into your valuable network of connections to find someone who’s interested enough in your venture to support it with a direct investment. While this model has a lot of advantages, one drawback is losing control of your project. A partner or angel investor will likely want some say in how you run things, and not everybody enjoys a backseat driver.
- Crowdsourcing
Many people now see crowdsourcing as the answer to so many questions, and theoretically, it works well for real estate too. Asset owners can leverage an existing platform, streamlining the process of making their offering available and accepting investors. However, many investors are hesitant to invest in an asset that’s not liquid, since there’s no escape route if they want to get out quickly. For asset owners, this can make it tough to attract investors.
- Marketplace Fractional Lending
One of the newer options is marketplace lending. This model lets asset owners divide up a portion of their property into digital tokens. In this scenario, you set the terms and pay back lenders at an agreed-upon rate and schedule, including pre-determined dividends—all without losing control of your project. And unlike crowdfunding, tokens are liquid, meaning they can be traded and cashed out at any time.
While some of these options are simply variations on old themes, fractional real-estate investment represents a truly innovative model. Taking advantage of emerging technologies such as blockchain to quickly record and enforce transactions, lending platforms promise to bring investors and asset owners together, quietly revolutionizing the world of real estate investment.
If you have a project you believe in, your goals are simple: you want to fund it as quickly and efficiently as possible while staying in control. Fractional lending represents today’s best option to do exactly that.
