Steps to Use Other People’s Money to Buy Real Estate
If you're looking to using other people's money (OPM) to buy real estate, make sure that you read this article.
There is no denying that entering the real estate investment market is a good long-term decision. It is a way to help build wealth and can be a great way to make the most of your retirement. But in order to enter the real estate investment game, you first need to own real estate. And this is where the issues can start. Unless you have excess money waiting to be spent, you are going to struggle getting started.
And you know what is better than spending your own money on real estate? Spending someone else’s money. And if I told you that you can spend someone else’s money for your own investments, you would want to know how, wouldn’t you? So, keep reading for the steps on how to use other people’s money to buy real estate.
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What are the benefits of owning real estate?
Before we start talking about how to purchase real estate, we should mention the main benefits of having it in the first place. Fortune Builders highlights the main benefits.
Not all real estate investing will require you to be a landlord. But if this is the path you decide to go down, rental income will be a major incentive. Your tenant, whether they be commercial or residential, will pay you for the privilege of living in your property. And you can use this income to pay for your mortgage and even earn a living.
Every dollar less that you pay the tax man, is an extra dollar in your pocket. Taxes are one of the biggest expenses for the average person, and this is especially true for investors. Rental houses, apartments, vacant land, commercial buildings, industrial, shopping centers, and warehouses all offer their own variation of tax incentives.
There are some ways of investing in real estate that can bring about fast and high profits. Such as the fix and flip. Purchase a cheap property that needs work. Spend a bit to get it fixed up and sell for a huge profit. Not all real estate investments will end up in immediate profit. But the potential is there is you play your cards right.
The benefits of owning real estate are clear. But as mentioned previously, the biggest hurdle is finding the startup capital. Using other people’s money is one of the best ways.
What do you mean by other people’s money?
When we talk about purchasing property with other people’s money, we do not mean finding strangers in the street and asking them for cash. Mashvisor explains that Other People’s Money (OTM) is a term that refers to using leverage to buy real estate. In other words, getting people to fund your real estate projects and agreeing how to share the profits. This way it is win-win for everyone. You get to own real estate without making yourself broke, and the other investors get to share in the profit.
Benefits of using other people’s money to buy real estate
The main benefit of using other people to help fund your real estate venture, is that sometimes you will not be able to go down the traditional route of securing a loan. Owning real estate by yourself is great as it means you do not share your profits with anyone, but sometimes this is not realistic. So, using other peoples as secondary investors means that investments that would have otherwise been out of your reach are suddenly available. It opens a whole new world of potential.
Bigger Pockets goes on to mention that many new investors will have limited cash. So, using other people’s money (or private funding sources) is a great way to build your portfolio and get you set up. Then in the future you can no longer worry about relying on other people for your investments. Everyone needs to start somewhere. It makes sense that new investors will need to use the assistance of others.
How to use other people’s money for real estate purchases
Knowing that you want to use other people’s money to purchase real estate is great but knowing how is also important. Green Residential highlights some of the best ways to go about using other people to help fund your real estate investments. The best method for you will depend on your experience, risk tolerance, connections, and skills.
Seller financing is one of the most common forms of using other people’s money to fund real estate. It is a way of transferring ownership of a property without having to take out a whole new loan. The current owner will transfer ownership and the title to the buyer along with a private mortgage. There will be special terms and conditions that will be legally binding, but it skips the need for a bank and a large down payment. The buyer now owes the seller the principal of the property.
This is what many people think of when you mention using other people’s money. It requires finding a group of investors and pooling everyone’s money together to go in as joint investors. One downside however is that many lenders will often require higher than average interest rates for any loans involving higher money.
Hard money loans are a special loan that are only available for certain types of investments – usually fix and flip. Lenders will loan money on a short-term basis, and the idea is that they get paid back (with high interest) quickly. The idea is that the money is to be spend raising the value of real estate, and then when it is sold (once renovated), the profit gained is used to pay back the loan. It is different to a traditional mortgage as it often does not require a down payment.
As can be seen there are a few ways that other people’s money can be used to purchase and invest in real estate. There are often strings attached of course, and these need to be understood before entering in any agreements. You should not let a lack of funds stop you from entering the real estate investment market. Especially when there are so many options out there for securing finance.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.