You Need Money to Make Money, But It Does Not Have to Be Your Money
If you want to invest in fractional ownership of real estate on platforms such as Invown, you can do so with as little as $500. But most people think that if you want to buy an entire property, you need a lot of your own capital. While one certainly needs access to capital to purchase real estate, that capital need not be one’s own. Access to capital was once very challenging, and one needed to be wealthy or well connected to access it.
Thanks to the Jobs Act of 2012 (sometimes called Crowdfunding), it is now easier than ever for the average person to raise money to start a business and to purchase investment properties. But before going into that, I’d like to explain how many real estate professionals buy real estate using other people’s money.
Let’s use a simplified scenario as follows:
Property to purchase: 4 unit multifamily apartment building
Purchase price: $400,000
Down Payment: $100,000
Conventional thinking is that the individual purchasing that property needs to have $100,000 of their own money. But many real estate professionals will buy a $400,000 property with as little as $10,000 of their own money. They do this by bringing investors into the deal. They put 10% of their own money towards the downpayment, and the investors pay the additional 90%. In return, investors are offered a specified return (usually referred to as a preferred return) from any cash flow the property brings in and a portion of any upside when the property eventually sells.
These investors are LPs (limited partners) who do not have an active role in managing or operating the property. Yet LPs have a tangible ownership stake in the entity that owns the property and, thus, in the property itself.
So while there is a lot of truth in the adage that says that you need money to make money, some overlook that the money does not have to be your money. Other people’s money, accompanied by your sweat equity, can also make you money. Traditionally raising capital for real estate involved significant restrictions based on securities laws. The JOBS Act has made it much easier for small businesses to raise money without running afoul of the law.
In the next post, I will review the different sections of the JOBS Act , how they relate to real estate, and how a change that came into effect in 2021 has made raising money for real estate using Crowdfunding an even more attractive prospect.
Disclaimer: The author of this post is not a lawyer, and nothing in this post should be seen as legal advice. If you have a securities question, consult a securities attorney. In addition, the author of this post not an investment advisor, and nothing in this post should be viewed as investment advice of any kind. This post is for informational purposes only. Consult with a licensed professional with expertise in the relevant areas for all practical legal or investment matters.