The pros and cons of using other people’s money in real estate investing.
When we say real private money, we’re not talking about companies who’ve just changed their name from “hard money lender” to “private money lender.”
We’re talking about real people. Actual individuals who want to lend you money on a real estate transaction. Real money that’s cheaper, easier, and faster than any funding you could get from an institution.
Let’s go over how other people’s money can be used to fund your transactions, plus the pros and cons.
How Does Other People’s Money Work?
Real private money is the ultimate flexible funding for your real estate investments. Once you have a relationship with a lender, funding a deal is as simple as calling them with a closing timeline and the amount you need.
Remember, we’re not talking about big Wall Street companies that call themselves private money lenders. These types of lenders have strict guidelines and an underwriting process. They have a box you have to fit in.
With real other people’s money, there is no box. You create all the terms.
Depending on the individual OPM lender, you can get small gap loans, or large loans for an entire project. Other people’s money can be short-term, long-term; down payments, carry costs; the options are limitless.
Benefits of Real Private Money
In addition to the total flexibility of other people’s money, here are some other benefits to this style of funding:
- It’s great for beginners. You don’t need experience, and you don’t need the qualifications required by most traditional lenders.
- No (or limited) red tape. They won’t check your credit score, income, tax returns, or require an application.
- It’s cheaper. There are almost never fees, and the interest rates are comparable to a bank’s (on the lower end for financing).
- You can close quickly. You don’t have to wait for an appraisal to happen or for an application to be processed. Funding is a phone call away.
- Do any deal. OPM lenders won’t have a box for you to fit in. As long as they get their return, most people could care less what type of property you invest in.
Why Would Someone Lend You Money?
Is it too good to be true? Why would a random person want to give you their money?
The thing about using real other people’s money is it’s an easy win-win scenario.
People with a lot of cash are always looking for a good place to put it, but:
- Most people don’t want to be in charge of their own real estate investments.
- Banks have a very low rate of return.
- The stock market is unpredictable. (A good source of real OPM is older individuals who are nearing retirement. Stocks give a good rate of return in the long term, but when someone plans on retiring soon, they’ll be looking for shorter-term stability).
These people are looking for you as much as you’re looking for them. It’s just a matter of attracting (and keeping!) the right people.
Downsides of Other People’s Money
So, what are the cons to using real private money? There are plenty of positives, but it’s wise to be aware of some potential trouble spots:
- It’s harder to find lenders. You can’t walk into a bank to get this kind of money; you just have to find the right individuals. Your OPM lenders don’t necessarily have to be millionaires, but they do have to have a good chunk of free money available for you. It can take time to find these people.
- Keeping OPM lenders can be difficult. It’s takes a lot of time and attention to nurture your real private money lenders. You need to keep their money secure, pay them on time, and provide them with good opportunities. It’s best to have multiple OPM lenders available to you.
- Finding other people’s money means selling the people on it. People who would most benefit from being a private lender might not even know what it means. If a doctor, dentist, teacher, etc is keeping their life savings in a bank account or IRA, then they might get a better return doing private lending. However, people outside of real estate might not understand how it works. It’s your job to explain how their money gets secured and how the process works.
The funding itself may be easier, faster, and cheaper, but with private money, finding and managing a relationship with a lender can be the hard part.
Just remember that anyone with money is looking for a stable return. If you can prove you’ll provide that, funding opportunities will start rolling in.
How to Get Other People’s Money
So how does the process work once you find other people’s money?
If you need help finding, attracting, convincing, or setting up an OPM lender, let us know. For the last 15+ years, we’ve raised millions and millions of dollars through OPM. Send us an email at Info@TheCashFlowCompany.com with any questions.