Suppose you have $ 50,000. All things being equal, would it make more money to invest the $ 50k in a single trade, or to invest $ 10k in 5 different offers? Leveraging other people’s resources to allow you to make multiple deals instead of putting all your precious eggs in one basket should allow you to receive higher returns!
Do you think wealthy real estate moguls like Robert Kiyosaki, Donald Trump, or Dolf De Roos use their own resources when investing in real estate? Absolutely not! They have made most of their fortunes in real estate using funds that are not necessarily their own.
“Going back to the difference between a saver and an investor, there is a word that separates them and that word is LEVERAGE. A definition of leverage is the ability to do more with less.” – Robert Kiyosaki Why we want you to be rich
These resources include, but are not limited to, Other People’s Money (OPM), Other People’s Credit (OPC), Other People’s IRA (OPI), and Other People’s HELOC (OPH). This article will focus on ways to use other people’s money.
There are 2 ways to use OPM in real estate investing: either as money partners or as private lenders. The role of the money partners is to provide funds for the deal. They receive a portion of the total profit from the transaction (but not a guaranteed rate of return).
Private loans are the process by which you, the investor, borrow money from an individual (rather than borrow from a financial institution or “hard money”) and use the money to invest in real estate. The private lender is not your partner in the transaction, but receives a fixed rate of return. When the investor receives a profit from the transaction, a portion of the proceeds repays the lender’s principal plus interest, while the remainder goes into his pockets as profit.
The first step is to determine how much money you are trying to raise. Once you’ve calculated that amount, you need to find people to loan you the money.
Why would someone lend you private money? Well, look at the alternatives. If you have an associate who maintains $ 100,000 in a bank account, cd, or retirement plan, they will likely only earn 2-4% of their money. But if they were willing to bank and First National Bank of You, you could pay a 6-8% return on their money, backed by real estate, and give them a 150-400% increase in their return!
Who are the potential private money lenders? Anyone on your contact list, from friends, family, neighbors, co-workers, doctors, lawyers, etc. Don’t be afraid to ask! Some of our best private lenders come from people who least expect.
How do I approach potential private money lenders? There are several ways. First of all, you may want to have a frank conversation in which you explain what you are doing and what you are looking for. Or, you can use a gradual approach, in which you include suggestions here and there about needing money until you finally ask (or get asked). You can send regular emails about your investment opportunities and see if people respond.
Remember, when you send out any printed form of advertising trying to find funds, DO NOT say things like ‘Guaranteed Return’ or advertise a specific interest rate. The SEC tends to disapprove of such activities. When posting any advertisement, it is best to seek the guidance of an attorney.
What do I do when someone is interested in lending me private money? The first step is to find out what rate of return they are looking for. Your personal rate of return may be 18% and you may have even budgeted an 18% return for this project. But that doesn’t mean your lender isn’t satisfied with a lower yield, say 12%. Always ask the following questions:
“What rate of return are you currently earning on the money you want to lend?”
“What rate of return would you like to get to make it worth your while?”
Remember, someone who currently earns 2% on $ 100,000 would probably be happy to earn 10% on that same money. So don’t miss out on 18% or you won’t be able to maximize your own performance.
Another tip: try not to make payments during the loan. If the lender wants payments, they can offer a lower interest rate. But be flexible as different lenders want different and unique arrangements. Also, lenders may want interest-only payments, but see if you can make them accept quarterly or annual payments instead of monthly. There are no set rules on how you should pay, so get creative and find a mutually beneficial arrangement.
Finally, don’t get obsessed with your own personal experience or credentials. First, if the deal is good and the profitability is strong, your experience may not emerge. If so, look to partner with someone else who has experience. You may have to share the profits, but if that gets you started and allows you to trade profitably in the future, then this investment may be the strongest of all!
