Real estate investing can be a lucrative way to boost your income and secure your financial future. However, for a regular American with an average income, the thought of buying an investment property may seem far-fetched. Many think that real estate investing is only a viable option for the wealthy. However, that’s far from the truth. Even if you don’t have a lot of money in the bank, you can still invest in real estate and build substantial wealth.
While it takes money to make money, you don’t have to use your own money. If you are creative enough, you can leverage other people’s money to buy real estate. You don’t even have to save up a large down payment for years. For savvy investors, the secret is to make money from other people’s money.
What Is OPM (Other People’s Money)?
In real estate, other people’s money (OPM) is a term that refers to using leverage to buy real estate. If you are just starting out in real estate investing, you may not have the cash or credit to finance your property investments. However, if you are capable of finding profitable real estate deals, you can get people to fund your real estate projects and agree on how to share profits. This is a win for both parties.
Why Should You Use OPM to Buy Real Estate?
Using other people’s money has gained ground over traditional financing options like banks or mortgage lenders due to a number of reasons. First, not everyone can qualify for a conventional loan from a bank. Therefore, for a new real estate investor with limited access to cash, learning how to use other people’s money to buy real estate is vital.
If done right, using investment loans can also dramatically increase your return on investment in a way that you wouldn’t have been able to if you relied on your own money. With time, you can grow your real estate portfolio exponentially. Moreover, using OPM will help to lower the risks that come with real estate investing.
Ways to Use OPM
There are several approaches to investing in real estate with other people’s money. Here are some of the most common:
Seller financing (also known as owner financing) is an arrangement where the property buyer signs a mortgage agreement with the property seller at a particular interest rate instead of a bank. The buyer then makes regular installment payments to the seller over a specified period of time until the loan is fully repaid. The terms of the arrangement will be outlined in a promissory note.
The title to the investment property is transferred to the buyer and they gain the right to sell it. However, the loan is secured by the property being sold. This means that, if the real estate investor defaults, the seller can repossess the property.
Another option for investing with other people’s money is with private money. You can raise money to buy an investment property from wealthy individuals in your professional or personal network. This includes family members, friends, and colleagues. They will not only fund your purchase but also assume the risk.
This investment property financing method appeals to investors because interest rates and terms are usually negotiable. There are also no federal regulations.
If you have the time and skills, you could find investors who are willing to provide the investment capital while you find and manage real estate. Investors may have money to buy real estate but lack the interest or time to be involved in real estate investing.
This is one of the easiest and most effective ways to use other people’s money to get rich through real estate.
Hard money loans are typically used by real estate investors looking to finance short-term investment projects like flipping. However, they tend to have higher interest rates.
Bartering is another possible way of buying a house with other people’s money. A real estate investor may barter services, products, or properties with a property seller in return for real estate financing.
Mitigating the Risk of Using Other People’s Money
While using other people’s money can be a great way to finance real estate deals, it’s not free from risk. However, people will expect returns to match the level of risk. Therefore, if you are looking to use OPM to acquire real estate, there ought to be a clear opportunity to make a profit. The key is to strike a balance between risk and reward.
Savvy real estate investors ensure that they use financing that will maximize their return on investment. Therefore, you need to factor financing into your ROI calculations. The best and easiest way to do so is to calculate cash on cash return using Mashvisor’s investment property calculator. Cash on cash return is an ROI metric that takes into consideration the financing method. Sign up to Mashvisor now and analyze your investment.
Related: What Is a Good Cash on Cash Return?
Another way to mitigate risk when using OPM to buy real estate is to purchase positive cash flow properties. This will allow you to pay down your debt without having to use money from your pocket. This way, you can avoid defaulting on your loan payments. Defaulting could lead to repossession of the property or a lawsuit.
Again, Mashvisor’s calculator allows you to estimate the cash flow of investment properties for sale in the US housing market to ensure you end up with positive cash flow.
It’s also important to note that spending other people’s money puts your reputation on the line. If you have a poor track record, finding OPM investment property financing options can be challenging. Therefore, be sure to use tools like Mashvisor’s calculator whenever you are buying a rental property to ensure profitability.
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The Bottom Line
One aspect of real estate investing that makes it a lucrative investment option is that you don’t necessarily need to have deep pockets to get started. For beginner real estate investors with no means to get into the real estate investing market with their own funds, using other people’s money is the solution. By using OPM, you can get started in the property business and continually build your portfolio. Depending on your situation and the risk you are willing to take, you could use any of the above options.
To learn how Mashvisor can help you make profitable real estate investment decisions, schedule a free demo with our team.