Blog | Real Estate

How to Invest Using Other People’s Money (Successfully)

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

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Summary

  • Using other people’s money (OPM) to raise capital is a strategic way to leverage your way to financial independence

  • Acquiring OPM requires a plan that covers the investors’ main questions

  • There are many ways to acquire other people’s money


Imagine you have the opportunity to purchase an old, but classic 10-room boutique hotel that’s about to go into foreclosure. But there’s something missing. Could it be … cash?

Or let’s say you have a small business you want to start or you have an existing business you want to grow, but you need an injection of money to take you to the next level. You call a few people you know outside the company as potential investors, but how do you persuade them to invest in you and your business?

Here’s one more scenario: A woman you’ve met on several occasions approaches you to invest in a privately run wind-energy company that’s been operating for five years. You’ve got the cash, but what do you need to know in order to decide if this investment is right for you?

Raising capital, also known as OPM—Other People’s Money, is a must-do in the world of investing. But it’s also one of the most intimidating parts of starting out as an investor.

The power of using Other People’s Money (OPM)

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.

Many people come across this concept and immediately think “debt.” But the truth is, there is bad debt, and good debt.

Bad debt is something that does not increase cash flow or that reduces cash flow (like 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 (like purchasing a property that can be rented out and generate cash flow).

Financially free to professional investors

It’s important to understand the different ways people view raising capital.

Many people are conditioned their whole lives to live below their means. Unfortunately, they tend to bring that same mindset about personal finances into the investing world.

To better explain the difference, see the diagram below. We refer to this simple graphic as the CASHFLOW® Quadrant. Robert’s rich dad used the CASHFLOW® Quadrant to explain the four types of people in the world.

The CASHFLOW Quadrant graphic

On the left side are the Es and Ss. Regardless of whether they work for a company or run a sole-proprietorship, these people exchange their time for money. On the right side of the quadrant are the Bs and Is, these are the “Business Owners” and “Investors.” Though there are many other differences between people on either side, it’s knowing how to leverage other people’s time and money that makes the biggest difference.

By understanding how to make money by using other people’s money, you can make the leap from the E/S side, to the B/I side, and become a professional investor.

What a lender or investor really wants

Here’s the answer to the big mystery: Lenders and investors (such as banks, private organizations or individuals) simply want to know that they are going to get a healthy return on their investment. If they give you X dollars, then how much money will they get back? They want a good ROI.

A presentation need not be long or complex. It will differ, depending on the business or investment involved. Often, when a pitch is short and concise, it reflects that the presenters are confident in knowing what the investor wants and secure in knowing that they can deliver it.

So, the key to raising money comes down to four fairly simple factors that will help demonstrate the ROI they are seeking. Let’s cut right to the chase with this efficient formula:

If you are raising money for an investment, then what exactly is the investment, and what makes this investment so attractive that they should place their money in this one versus another investment?

Remember, it’s easy to tell a prospective investor all the positives; but be sure to be realistic and honest; this means there may be some negatives of this project as well. Have a plan ready for how to overcome challenges and keep it moving.

Keep it simple. Keep it concise. Keep it real.

Imagine you’re the investor; what are critical pieces of information you would need to hear in order to have faith in your investment? This is common business sense; whatever experience the partners bring to the table will directly influence the level of confidence in your investors.

  1. Project

    When presenting the project, ask yourself these questions: What is the project the lender is providing you capital for? If it’s for your business, then what exactly is your business? What makes your business unique from others in your industry? And what is the advantage your business has that will build confidence in the investor that it will be successful?

  2. Partners

    Who are the key players in the project? What is the track record of those partners? What experience do they have? In other words, who’s putting the deal together and what success have they had? The experience each partner brings to the table, and thus their expertise, is a big part of the equation.

  3. Financing

    Show the investor, as accurately as you can, how the project (either a business or investment) will make money. Be realistic and don’t avoid discussing the roadblocks ahead—every business and investment project has problems, so pretending yours won’t makes you look like an amateur. You’ll want to show how much money you’re raising in total, where the money is coming from (private parties, traditional lenders, etc.), the terms of the money being borrowed and how the money will be allocated.
    Hint: If you even suggest that any of the money raised will be used to pay your salary, doors will close. If you want a paycheck, then get a job. Potential investors want to know two things:

    • How soon will they get their initial investment back? And
    • What their return will be.

    These numbers will determine if your financing structure and terms are attractive.

  4. Management

    The historical saying is, “Money follows management.” Investors want to know who’s running the day-to-day operations, because this is crucial to the ongoing success of any venture. Explain who they are, their background, how they react under pressure, etc.

If you are starting your own business or if you’re raising money to grow your existing business, then the partners and the management team may be the same people. That’s not a problem at all if there is experience and expertise in the team that will fuel confidence in the investors.

When it comes to commercial or residential rental properties, management is key. It is the day-to-day operations of an office building, a retail strip mall, a single-family house or an apartment building that will make or break your bottom line.

Where to get OPM?

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 capitalists, 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.

In summary: how to invest with other people’s money

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.

It may seem intimidating at first, but raising capital does not have to be a long, drawn-out affair. Your pitch to investors should be short and concise. If you can clearly and confidently address each of the four aforementioned issues when looking to raise capital, then the odds of securing the financing you seek are in your favor. Now, the only thing left for you to do is deliver!

To get started with some guidance, download your copy of Rich Dad’s eBook, How to Buy Your First Investment Property for free.

Original publish date: November 16, 2017

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