If you have been around the real estate investing business before, you are probably aware of the acronym O.P.M., which stands for other people’s money. Leveraging the funds of others, for that matter, is one of the best ways to get a new real estate business off the ground. And to that point, there are two basic strategies centered around using O.P.M.: private and hard money. Each of them serves the same basic function, but offer two completely different ways to go about funding a deal. With private money, you are tapping into friends, family and co-workers to form a financial partnership on the deals you buy. With hard money, you are using funds from an individual or partnership to earn a higher return on their capital. Almost all successful real estate investors have multiple options for using O.P.M. They may not use them on every deal, but in the right situation, it makes perfect sense. For as many people that swear by O.P.M., there are still a few detractors. Let’s take a look at some of the reasons people may not want to use O.P.M., and why it may pay to ignore them:
“The rates and fees are too high!”
There are times in the real estate business when beggars can’t be choosers. If you do not have access to your own capital or do not want to use traditional lender options, funding is limited. Your only options may be hard and private money lenders. As simple as it sounds, making something on a deal is better than not making anything. Increased hard money options have pushed rates and fees down considerably. With private money lenders, you can negotiate the best terms and fees that you are both comfortable with. Whatever the terms are, they give you an entry into the business. Having access to capital allows you to make more offers, and to ultimately have more of those offers accepted. Making a smaller return on numerous deals adds to your bottom line and accelerates the speed in which you can accumulate your own funds. If you are using these funds for rehabbing properties, the impact of the interest rate will only be felt for as long as you own the property. In most cases, you can turn a rehab property around in as little as 90 days. O.P.M. rates and fees are higher than a traditional lender, but they should be; they have the funds and can dictate the terms. Just because the rates are higher than you may like, however, doesn’t mean you should ignore them.
“My local lender has rates around 4%.”
There are many investors who have done quite well using traditional lender options. However, there are significant restrictions on how quickly you can close, and even if you can get approved. Your local lender does have much lower interest rates, but only if you can take advantage of them. For starters, you will need a down payment anywhere between 20-30%, coupled with strong credit scores. You will also need to document all of your income, and be prepared to wait anywhere from 30-45 days. Most sellers do not want to deal with a lender financed option. If there is a cash offer at a slightly lower price, most would rather accept the sure thing. Additionally, the industry norm allows for a maximum of 10 total loans on your credit report, which includes second mortgages. Even if you don’t mind the process, sooner or later you will hit ten and be forced to find alternatives.
“I don’t know where to find a hard money lender.”
In recent years, there has been an influx of hard money lenders in most markets. Last decade there were only a handful of these lenders. They were considered a last ditch option that was used for foreclosure prevention or other emergencies. Today, there are more hard money lenders than ever before. Most of these companies have websites and operate very much like lenders, in that they have defined rates, fees and terms. The biggest difference is that they are not bound by specific guidelines. Finding hard money lenders is as easy as asking your real estate agent, attorney or accountant. There are usually a handful at most real estate clubs and networking events. There is a natural instinct to be intimidated by what you don’t know. With so much competition, you can shop around. Talk to as many different hard money lenders as possible and find the best fit for you. What you will find is that they want your business just as much as you want to work with them.
Once you develop a relationship with a lender, you will begin to gain trust. Instead of constantly looking over your shoulder and giving updates, you are given freedom to work. It will take a while to get to this point, but once you do it will change your business. You can focus on finding good deals and making offers that work for you. Using O.P.M. may not be perfect, but it is a perfectly good way to get started or take your business to the next level.