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Investing in Real Estate with Other People's Money

Build wealth quick tapping into the incredible buying power of other people's money

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OPM, or Other People’s Money, is exactly what it sounds like; using capital and money that belongs to other people to invest and control more and larger assets. The benefits are many, but a big bonus is that you can boost your cash flow much faster, more reliably and more effectively than if you’d used your own money and capital. While it seems counterintuitive, using money that isn’t yours is exactly how you’ll find investing success.

OPM gives you, the investor, the power of leverage! As an investor with small capital or investment money, you can use the power of bigger capital to make investments that can ‘lift up’ large investments. Think of a children’s see-saw on a playground. If you are a small child on one end, with an older and bigger child on the other, you would struggle to lift the other child off the ground. But move the small child closer to the middle, and suddenly the power of the little guy is increased, and you can lift that larger investment off the ground.

“Leverage is the reason some people become rich, and others do not.”-Rich Dad

Less than 5 percent of Americans know how to use the power of leverage, and that is exactly why less than 5 percent of Americans have all the wealth. Here’s an example of the power of leverage:

Consider an investor has $10,000. She can invest this $10,000 in the stock market and control $10,000 worth of assets. This is ‘leverage-free’ investing.

But if she used the $10,000 as a 10% down payment on a property and used OPM (in this case, a mortgage for the property), she now controls a $100,000 asset. This property or asset can generate much larger cash flow than just a $10,000 asset. OPM allowed this investor to invest in a larger asset.

But just as the power of leverage can help you create wealth with investing, leverage can also hurt you. The difference is whether you apply leverage to good debt or bad debt. Bad debt, as Rich Dad says, makes you poor. So, what is bad debt?

Bad debt is something that does not increase cash flow or that reduces cash flow. Bad debt is charging a restaurant meal on a credit card or buying a boat on a payment plan. Good debt, on the other hand, is using OPM to pay for new production equipment that increases a business’s sales and profits. Good debt is purchasing a property that can be rented out and generate cash flow.

People are typically loaded with ‘bad’ debt or live in fear of debt

So, where do you get OPM and what ways can you use leverage to build wealth? Here’s a list of some common ways to tap into Other People’s Money.

  1. Angel Investors/Venture Capitalist: An angel investor is often a successful business owner that has substantial money to lend but are not professional investors. They may lend more money than a bank would and take on a riskier investment. Sometimes, they make investments because they have a genuine interest to see the project succeed, rather than just a straight-forward financial interest. Venture capitalist, however, are usually firms of professional investors who can raise large sums of money and offer their expertise on projects. You might also expect they will want considerable control in their investment, such as a seat on the board of directors, for example.

  2. Traditional Financing: A common and familiar way to finance a purchase, traditional financing is often easy to get. But keep in mind, to create ‘good’ debt, use traditional financing for investments that will put money in your pocket, or create cash flow. NOT, liabilities.

  3. Conventional and Bank Loans: Mortgages, auto loans, home equity lines of credit can all be ways to access OPM. There are two distinct categories for these types of loans-secured and unsecured. Secured will need collateral to back the loan up, like a home or car. Unsecured loans are based on credit, character, and ability to repay. Unsecured loans often have higher interest rates because they are riskier for the bank, and often more difficult to get.

  4. Credit Cards: Easy to obtain and widely used, this form of OPM is often used and abused for financing. People who don’t have money often use them to keep up the appearance that they do. Using credit cards for minor purchases usually increases expenses and decreases cash flow. However, credit cards, if used correctly, can be helpful. Use it to finance an investment, such as a kitchen remodel that increases the value of an investment property. This allows you to charge a higher rental rate and therefore increases your cash flow (and your investment overall).

  5. Non-traditional Financing: While this seems like a risky or shady way to finance an opportunity, it is only less common with the poor and middle-class. The wealthy use it often.

  6. Creative Financing: Often seen in owner-financed properties, lease options, and seller-carry back, this type of financing can sometimes be a win-win for both parties. An investor can sometimes purchase a property with little to no money down, and subsequently, this type of sale could benefit a seller by reducing their capital gains taxes that would be triggered with a traditional sale.

  7. Peer-to-Peer Lending: A non-traditional form of financing, PTP Lending brings borrowers and investors together and cuts out the middlemen such as banks. Typically, this works when a borrower requests loans on an online platform. Investors scan the listings and can fund as much or as little as they want. Once the loan is fully funded, the borrower gets their money, and the investors get monthly cash flow in the form of principal and interest.

  8. Private and Hard Money Lenders: These are individuals that have money and are willing to lend it to you. Private lenders can be friends or family, or contacts made through either. Typically, the relationship of friends and family play a role in these loans, and they want you to succeed. Hard money lenders are different in the fact that they are making the loan for a purely financial benefit. You would not likely have any prior relationship with a hard money lender, and they are going to be focused on the collateral and the repayment.

Which OPM source is right for you?

It’s a good idea to research the source options for finding OPM and understand them fully. To help determine which option is a better fit for you, start with figuring out how you will use the funds.

Seller financing or conventional mortgage loans are great for real estate transactions and investments. Most other sources of OPM are not likely going to want a 30 year loan on the books. Angel investors and venture capitalist are a good source for OPM to start or purchase a business or fund the development of a prototype for a new product or technology.

Using Other People’s Money can catapult your investment power by leveraging debt the right way to make bigger investments with better, faster cash flow and return. You can build wealth by tapping into this buying power and get richer, quicker.

Original publish date: May 05, 2022

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