Top 4 Ways to Raise Money for your Real Estate Project

Oct. 31, 2011 - PRLog -- Hey, I am looking for investors!!  I must hear the phrase "I am looking for investors" every single day.

What most innocent folks don't know is that they are violating securities laws by uttering those very words. Now these normally law abiding citizens don't mean to offend the SEC or their local, friendly state securities board, but unfortunately, they are, because they may just have made an offer to sell securities.

The definition for a "security" was outlined in SEC V. HOWEY CO., 328 U. S. 293 (1946):

"Under Section 2(a)(1) of the Securities Act of 1933, “unless the context
otherwise requires,” the term “security” includes
any note, stock, treasury stock, security future, bond, debenture,
evidence of indebtedness, certificate of interest or participation in
any profit-sharing agreement, collateral-trust certificate,
preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for
a security, fractional undivided interest in oil, gas, or other mineral
rights, any put, call, straddle, option, or privilege on any security,
certificate of deposit, or group or index of securities (including any
interest therein or based on the value thereof), or any put, call,
straddle, option, or privilege entered into on a national securities
exchange relating to foreign currency, or, in general, any interest or
instrument commonly known as a “security”, or any certificate of
interest or participation in, temporary or interim certificate for,
receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing."

This means that any time you ask for money, that you will have control over, to gain a profit for the "investing" party, you have sold a security. It does not matter if you term it as a loan or as a "percentage of the profits." It's a security.

What about a partnership?
Is the individual (or company) investing as a "partner" only investing money and has no control over the company or the money? It's a security.

What if it's only a small investment?
It's a security - it could be $10 - it's a security.

What if I tie the investment to real estate?
It does not matter, if there is no control over the estate or the underlying investment, it's a security. As a matter of fact, the Howey case that defines a security, was about land: the defendants in the case had sold one acre parcels of land to the investors. The investors were on the title of the land, but the defendants had also said to the investors "purchase this land and we will farm the land, sell the fruit from those farming efforts, and give you the profits." This was deemed a security.

So how can a small business owner avoid such malfeasance? Well, for starters, they can check out Jillian Sidoti at http://www.oreiaconvention.com.

Top 4 Ways to Raise Money for your Real Estate Project

Most real estate investors, when starting out, are made to believe the only way to finance their real estate deals are through banks and major lending institutions. However, as the banking crisis has proven, this has become increasingly difficult.

This is the best time ever (at least in my lifetime) to invest in real estate. The prices are at historical lows and often times, deals can be found at below replacement cost. So, below are some ideas on how to get money to take advantages of the many opportunities now present.

1.) Find a good, liquid, hard money lender.

Private lenders are popping up all over the place. If you don't want to deal with individual investors via a private placement memorandum and would rather deal with one party, you could use the services of a hard money lender. However, these lenders are costly. Currently, the cost of a hard money lender is about 5 points and 12% APR.

2.) Use a private placement memorandum to find private investors.

Right now, people are very shy about investing in the stock market after seeing their 401(k)'s and IRA's be cut in half over the last year. However, many folks do not have the time to take on full time real estate investing. Therefore, they look to the professional real estate investors such as yourself to find deals. Before taking the money of a potential investor, however, you must present them with a private placement memorandum. The investor also must be qualified to invest (see other blog posts on accredited investors vs. unaccredited investors.)

3.) Start a REIT

A Real Estate Investment Trust is great if you want to purchase large projects and need large amounts of capital. It is also a structure that insures the investor that you will be making some sort of distribution every year as REIT law requires that 90% of all proceeds be distributed.

4.) Go Public

Going public is not that hard and it provides a market place for investors to sell their interest in the event they want to get out. There are reporting requirements and a financial audit is required.

To find out more about financing your real estate deals like how to go public, fund a private placement memorandum, or even find investors, attend the OREIA convention and see Jillian Sidoti speak on this very topic!  http://www.oreiaconvention.com