What’s the hardest part about real estate investing? Finding the money to secure a property. While there are dozens of ways to fund an investment, using other people’s money, or OPM, can be a great way to get started in the industry. OPM allows you the opportunity to invest privately while staying away from mortgage lending properties and banks.
With seller financing, the mortgage or deed of trust is transferred to the buyer. Along with the mortgage or deed, the buyer receives a promissory note that states the loan’s terms and conditions of the seller. Seller financing is a great option when a buyer cannot provide the total amount of cash needed to close.
In this case, the mortgage stays in the seller’s name and the investor makes monthly payments to them to cover the mortgage payment. With existing financing, agreements are often made between the investor and the seller so that the investor can sell the property for a profit if they so desire. Additionally, some agreements may include a second payment to the seller so that they can generate a profit.
The other option is to use an equity partner, also known as a cash investor. In many situations involving this type of OPM, there are a few equity partners. Multiple partners allow for an excellent pool of cash that can be used for an investment. Equity partners earn a percentage of the property’s return or through repayment interest.
If a buyer is in a pinch and needs fast cash to secure an investment, they can seek out hard money lenders. The loans they provide are short term, usually 6 months to a year, and include much higher interest rates than traditional real estate loans. Many people who flip houses use this kind of OPM.
Much like working with equity partners, a buyer can seek money from wealthy investors or hedge funds to secure cash. Private money OPM also includes using retirement accounts to find the cash needed to fund a purchase.
Why You Should Consider OPM
If you’re new to real estate investing or trying to build out your investment portfolio, it’s likely that you’re a bit strapped for cash. OPM and private funding allow you to maximize your portfolio and generate a cash reserve that you can use for future investments.
Additionally, OPM investing decreases your risk and exposure since other people’s money is on the line. With that said, your success in real estate is tied to your reputation—making smart investments and generating money for your investors will set you up for success. If you become known for losses, you’re unlikely to receive financing in the future.