You’ve probably already heard about funding, and now you are wondering if you should look into it further. Maybe your knowledge about funding is limited, and you’re looking to learn more about the potential benefits – or risks – to your business. Wherever you are on your real estate business journey, we’ve got the basics covered here to help you determine whether funding is the right next step for your land investing business.
Bottom Line Up Front:
The land investment business is one in which your biggest expense relies on one thing – property acquisition. For this reason, you should take seriously where this capital comes from. Determine what your risk threshold is and ensure you stay within it. Carefully weigh the pros and cons of using funding and surround yourself with partners you think you’d want to work with long-term. A partnership engagement is a relationship, not just a transactional opportunity!
In businesses looking to expand, funding opens the door to scale. Instead of basing your goals on your own limited capital, establishing funding partnerships forms a business model that you can apply in a repeatable way. We’ve used funding for our own investments and it was a game changer; we’d encourage everyone on this space to look hard at the opportunities funding provides, but go into it eyes wide open.
What is Funding?
In the simplest terms, Funding in the land investing space is leveraging other people’s money, connections, and experience. It’s bringing on a partner so you have more capital to invest in other parts of your business and not tied up in inventory.
In addition to just the capital, a partner can provide motivation and encouragement. You’ll gain another viewpoint to confirm you are on the right path with your purchase and development plans. If done right, it will expand your vision, help gain access to larger deals and facilitate scaling your business.
There are a lot of different forms and structures that funding can take, but funding is not a loan: neither a hard money loan nor a short-term loan. Simply put, it’s an equity investment and a true partnership.
Limitations of Using Your Own Money
Using your own money to fund your land business involves many limitations, some of which are detailed below.
1. Entry Barrier
For many trying to break into the land business, one of their greatest challenges is a lack of funds. To get started, they feel they need to only target low-value deals because they don’t have the funds to take on bigger, more expensive, trophy properties. This can be time-consuming, delay growth, and demotivating. It’s a shame when we see folks get used to doing small deals and then only target properties they can afford based on their account balance. We recommend, if the goal is to scale (not always the case), leverage others’ time, experience, and resources!
2. Tying Up Your Capital in Inventory
If most or all of your capital is tied up in inventory, this will impede growth and may ultimately be detrimental to your business. Many land investors find they reach a point when they hit a limit – everything stalls and comes to a halt and then it becomes hard to get your momentum back. We’re seeing more and more, where land investors bring in the leverage of a funding partner before you actually need to. You also don’t want to put yourself in a position of needing to sell property just to free up capital to take advantage of a great opportunity; with the right partners in place ahead of time, this can be mitigated.
3. Spending Yourself Out of Money
If you are trying to scale your business, then you need a profitable and scalable business model. This involves repeated turnover of cash for investment, and you want to be ready to invest when opportunities arise. Try not to spend yourself out of money, especially as you start aiming for larger properties to purchase.
Is Funding for Me?
Setting your goal based on what you have is limiting. Your lack of resources, whether financial, experience, or skills, might make you shoot low.
When setting your goals based on what you want to achieve, determine what your pain point is and how you can solve it. What exactly is holding you back from growth? What do you find fulfillment in? What do you struggle with?
The leverage of funding is probably right for you if:
- You are an experienced investor, and you’re getting into larger deals.
- You have an interest in cash sales, whether exclusively or in addition to seller financing.
- You find yourself being held back by capital flow issues.
- You are working hard for land investment to be a big source of income, so you can achieve other goals in your family, church, or any other organizations you belong to.
Funding may not be the best option in every situation. Some of the times when funding your business is not advised are:
- When the deal is too small to offer a worthwhile return to both parties.
- When the margin on the deal is not enough to split. In cases like this, you can go ahead by yourself if you have the money to fund it.
- If it’s not your goal for your business to grow too much. You might just be into the land business for some extra cash and that’s great!
Here at Freedom Land Capital, we have several clients who change their business model to include funding in every deal. Their target is newer markets and bigger deals, and their confidence in our ability to support the acquisition of any quality deal that comes up gives them the courage to go for it. We hope you do too!