Five Ways to Finance Your Real Estate School
When you’re first starting a real estate school, securing the capital you need to grow is a critical concern. Luckily, there are various financing options available to help new entrepreneurs shoulder start-up costs no matter your financial situation. We’ve outlined the most common ones below.
Hard Money Lender
Hard money lenders are a financing tactic often used by real estate investors. Rather than coming from a bank, the funds for these investments come from a private individual or group. Because these loans do not need to go through any corporate procedures, they often have looser qualifying requirements and can be secured faster. Additionally, private lenders may be more open to backing risky projects.
With that in mind, investors should be confident in their ability to pay back the loan quickly before signing on the dotted line. Hard money loans often have extremely high-interest rates and require a sizable down payment or personal collateral. They also have much shorter terms than traditional loans, averaging only a year or two.
Microloans are typically geared toward newer schools or startups that need capital to generate further growth. As the name suggests, these loans are smaller than what’s usually offered with traditional bank financing. Lower balances mean that microloan programs are less strict in terms of their qualifying requirements like credit score, which can comfort those concerned about borrowing above their means.
However, microloans may not be a good fit for everyone. Though these loans can go up to $50,000, the average loan is only about $13,000, so it’s essential to gauge overhead costs accordingly. Also, their interest rates are typically higher than those offered through standard loan programs.
Real Estate Crowdfunding
In the past, investing in real estate was limited to those with deep pockets. However, with the passage of the 2012 JOBS Act, crowdfunding is how investors diversify their portfolios at a much lower cost. Rather than searching and restoring properties on their own, investors can browse crowdfunding platforms to select from a list of available investment projects in which to participate. They then have the opportunity to finance shares of the property at a low cost—sometimes as low as $1,000—and collect a portion of the profits or rent payments once the project has been completed.
That said, this type of investing does come with elevated risk. Investors have much less control over the outcome than they would in a traditional fix-and-flip scenario. Be aware there could be a longer wait for a return on investment, depending on how each deal is structured. Additionally, know that the investors will shoulder the loss rather than the builder if the project fails. You can learn more about crowdfunding in this in-depth article.
SBA, Small Business Association, loans offer a guarantee of repayment to banks that are willing to underwrite loans for new entrepreneurs. The guarantee lets banks become more willing to take risks. While the affordability of a loan will depend on an investor’s unique situation, generally, these loans have higher borrowing limits—up to $2,000,000. SBA loans also come with longer terms, lower down payments, and protection against balloon payments, which can help schools maintain a stable cash flow.
It’s crucial to note SBA loans can’t be used to invest in real estate but can be used to start a real estate business or school, such as a brokerage or property management fund. Unfortunately, the security that SBA loans offer comes at a cost. In addition to being subject to high fees, investors must have a high credit score and show a significant profit on their tax returns to qualify. The application process is also lengthy and requires the borrower to put up personal assets as collateral.
If applying for a loan is not for you, a rollover as a school startup (ROBS) provider may be the best choice. This method of financing allows small school owners to draw funds from existing retirement accounts without incurring tax or withdrawal penalties. Because the money is their own, there are no debt payments, leaving them free to invest the total amount into business or school growth. Also, if the school should fail, this leaves no negative impact on their credit score or other assets.
Before committing to a ROBS strategy, an investor must be sure to weigh the risks. On the one hand, they can only draw the amount of money in their existing accounts, which means their available funds may be smaller than they would be with a loan. In line with that, if the investor decides to invest the entirety of their retirement funds into the school, and if the school fails, they could be left without security in retirement. Similar to SBA loans, ROBS cannot be used to invest in real estate.
As with any investment, each scenario comes with a unique set of advantages and disadvantages, so be sure to do thorough research before deciding which option is best for you. If you are interested in learning how to market your school, check out this article!