One of the biggest obstacles that potential real estate investors face is not having the cash capital that it takes to get started. Real Estate is an investment and investments essentially require using money to make more money. One technique in real estate investing is rapidly becoming more popular today, which is the Private Bank Concept or using other people’s money (OPM) to acquire properties.
What is OPM?
OPM, short for Other People’s Money, is when investors borrow money from individual people instead of banks or loan institutions. When utilizing an institution, like a bank, to fund the property, the investor is typically still required to pay a portion of the cost, in most cases a 20% down payment. For those without the means to pay this 20% portion, private lending or OPM is a great way to receive the funds without actually having the capital.
How does OPM benefit both parties?
It seems bizarre that a private lender would be willing to advance a large sum of money to help someone break into the real estate investment world. However, OPM methods have a benefit to both parties involved. Typically in these scenarios, each investor has an ideal part to play. The initial investor is willing to do the work to receive the highest return on investment (ROI). This could involve finding tenants for a rental property, handling maintenance, and is the point of contact for all transactions involved. The private investor supplying the capital would then likely act as a silent lender – someone who is interested in real estate investment but not in the maintenance involved after the property is acquired.
The loan will have an agreed upon interest rate and date that it must be returned to the lender. In the lender’s case, they would receive their funding back in full, and then interest. To the initial investor who lacked capital, they would receive only a portion of the profits from the property, but without providing any personal capital, only labor. Both parties close the deal with a profit of some amount. Using OPM for multiple properties also enhances the speed at which the investor can close on properties as no bank or mortgage is involved.
How do I get OPM?
Seeking family or friends who have a healthy sum in their 401k, IRA, or savings is a great place to start. Lenders are more likely to invest in someone that they know. The key to attracting investors is to first gain knowledge on the situation to better sell the deal. A good selling feature to convince someone to break into their retirement plans for funding is that any return profit would not be taxed. After some hard work and ROI build up, you can gain enough capital to invest yourself.