I had someone ask me: where do you get the money to buy real estate? There are a variety of different sources:
- Called the capital structure
- Hard work. Most banks will not let you use this as part of the capital structure
- Senior debt. This gets paid first and is the most senior capital.
- Seller Financing. This is subordinate debt to the bank debt above.
- Other debt from hard money lenders. Normally very expensive. 12%-20% or more
- Tax Increment Financing. This only applies to some deals. Basically it amounts to reduced taxes that the bank may or may not allow to be part of the capital structure.
- Private equity. This is investors who want to get into real estate. Also know as partners.
- The general partner’s equity. This means the investor putting the deal together.
When you think about capital structures, think big. Like a $500 million development. The money comes from a variety of people not just one person or bank. In many cases the banks form a syndicate so one does not take all the risk.
