Real Estate Venture Capital
Real Estate is a prime area for venture capital investment, but it is also an area where conventional and traditional financing is generally available. What makes a good venture capital real estate investment?
Real Estate is considered one of the most basic and traditional of all investments. There have always been people who consider land ownership as the most stable of all forms of wealth. The conventional financing industry is very involved in real estate. The large majority of real estates purchases are made with bank loans. So, is there a place for venture capital in the real estate industry?
Yes, there is, and it is mainly in the area of land development. Land development is a specialized area of real estate that involves the changing or improving of the land. Major subdivisions and building conversions are examples of real estate land development opportunities. The reason that conventional financing tends to shy away from such deals is that they see the basic value of the land itself. A lot with a single home with a buyer capable of repaying the loan looks good. A lot being converted into a mall appears risky and uncertain.
If the land development does not work out as profitable as intended, the only real collateral value is the land. The improvement represents risk that a bank might not wish to assume, but that a venture capitalist is more than willing to. This is why so many real estate deals are financed through angel investors. They are seeking the big potential profits that can easily be a part of a successful land development project, but involve risk.
Another area that has attracted the interest of venture capitalists is the formation of a real estate company. A real estate company generally needs a large amount of start up capital to be able to enter the market and compete successfully. These companies include those involved in home sales, but also can include apartment or condominium sales. Other real estate companies might specialize in rentals rather than sales. Regardless, a real estate company has need of a great deal of financing and can really benefit for added value financing offered by the venture capitalist.
Many of the most successful venture capital deals recently have involved real estate or land development ventures. Venture capital will never challenge the conventional lending institutions in the nuts and bolts land and home sales that make up the bulk of real estate transactions. Yet, there is always a cutting edge to any industry and real estate can offer its share of high return opportunities for venture capital investment.