Suppose you have $50,000. All things being equal, would you make more money investing all $50,000 in a single trade or investing $10,000 in 5 different trades? Leveraging other people’s resources to allow you to do multiple deals instead of putting all your valuable eggs in one basket should allow you to earn higher profits!
Do you think that rich real estate moguls like Robert Kiyosaki, Donald Trump or Dolf De Roos use their own resources when they invest 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. One 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 IRAs (OPI), and Other People’s HELOCs (OPH). This article will focus on ways to use other people’s money.
There are 2 ways to use OPM in real estate investment: either as financial 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 on the transaction (but not a guaranteed rate of return).
Private loans are the process by which you, the investor, borrow money from a private individual (as opposed to borrowing 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 pays the lender’s principal plus interest, while the rest goes into their pockets as profit.
The first step is to determine how much money you are trying to raise. Once you have calculated that amount, then you need to find people who will lend you the money.
Why would someone lend you private money? Well, look at the alternatives. If you have an associate who keeps $100,000 in a bank account, certificate of deposit, or retirement plan, you’ll likely only earn 2-4% of their money. But if they were willing to bank and the First National Bank of You could pay a 6-8% yield on their money, backed by real estate, and give them a 150-400% increase in their yield!
Who are the potential private lenders? Anyone on your contact list of friends, family, neighbors, co-workers, doctors, lawyers, etc. Don’t be afraid to ask! Some of our best private lenders come from the people you least expect.
How do I approach potential private lenders? There are several ways. First, you may want to have a frank discussion explaining what you’re doing and what you’re looking for. Or, you could use a gradual approach, hinting here and there about needing money until you finally ask them (or have them ask you). You can send regular emails about your investment opportunities and see if people respond.
Remember, when you send out any print form of advertising trying to find funds, DO NOT say things like “guaranteed returns” or advertise a specific interest rate. The SEC tends to disapprove of such activities. When placing print ads, 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 even have budgeted an 18% return on this project. But that doesn’t mean your lender wouldn’t be happy 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 finish?”
“What rate of return would you like to earn to make it worthwhile?”
Remember, someone currently earning 2% on $100,000 would probably be happy to earn 10% on that same money. So don’t let 18% slip away 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 may offer a lower interest rate. But be flexible as different lenders want different and unique arrangements. Also, lenders may only want interest payments, but see if you can get them to accept quarterly or annual payments instead of monthly. There are no set rules for how you should pay, so be creative and find a win-win deal.
Finally, don’t get hung up on your own personal experience or credentials. First of all, if the deal is good and the performance is solid, your experience may not come up. If so, look to partner with someone else who has experience. You may have to share in the profits, but if that gets you started and allows you to make future profitable trades, then this investment may be the strongest of all!
