If you have been involved in the real estate investing industry, then you are probably familiar with the abbreviation O.P.M., which stands for “other people’s money.” Leveraging someone else’s funds is one of the most effective ways to kickstart a new real estate business. There are two main strategies for utilizing O.P.M.: private money and hard money. While both options serve the same purpose, they differ significantly in terms of how you acquire funding for your deals.
Private Money: Tapping into Personal Networks
Private money involves forming financial partnerships with friends, family, and coworkers. By pooling resources, you can secure the necessary capital to invest in properties. Successful real estate investors often have multiple options for using O.P.M., even if they don’t leverage it for every deal. This strategy allows you to expand your offers and increase the likelihood of having them accepted. Although some people may have reservations about using O.P.M., it is crucial to consider the advantages it offers.
Some individuals criticize the use of O.P.M. by highlighting the perceived high rates and fees associated with it. However, when you lack access to your own capital or prefer not to use traditional lender options, hard and private money lenders may be your best or only option. Making a profit on a deal is always better than making nothing at all. Fortunately, the increasing availability of hard money options has led to a considerable drop in rates and fees. With private money lenders, you have the flexibility to negotiate terms and fees that align with your comfort level. Regardless of the specific terms, gaining access to capital allows for more offers, more accepted deals, and ultimately, a boost to your bottom line. Even though O.P.M. rates and fees may be higher than those of traditional lenders, it’s important to remember that they possess the funds and can therefore dictate the terms. Instead of ignoring O.P.M. due to slightly higher rates, it’s prudent to consider the bigger picture and weigh the benefits it brings.
The Appeal of Local Lenders
Some investors have achieved success by relying on traditional lender options. These lenders often offer lower interest rates. However, there are significant drawbacks to consider, such as restrictions on the speed of closing and loan approval. To take advantage of local lenders’ lower interest rates, you’ll typically need to provide a substantial down payment (20-30% of the property’s value) and have a strong credit score. Additionally, you’ll have to undergo income verification and be prepared to wait up to 45 days for the loan to be processed. In many cases, sellers prefer cash offers over lender-financed options, even if the cash offer is slightly below the asking price. Furthermore, there are industry-wide limitations on the number of loans (including second mortgages) that an individual can have (typically a maximum of 10) on their credit report. Sooner or later, this limit may force you to seek alternative funding options.
Hard Money: Expanding Opportunities
In recent years, the number of hard money lenders in most markets has soared. What was once considered a last resort for emergency situations or foreclosure prevention has now become a widely used funding option. These lenders, who operate similarly to traditional lenders but with more flexible guidelines, have established websites and clearly defined rates, fees, and terms. To locate hard money lenders, you can start by reaching out to your real estate agent, attorney, or accountant. Additionally, most real estate clubs and networking events have a few hard money lenders in attendance. Don’t let the fear of the unknown deter you – take the time to explore and compare different hard money lenders. You will find that they are eager to earn your business.
Building Trust and Freedom
Establishing a relationship with a hard money lender takes time, but the trust that develops is invaluable. Once you have gained their trust, you will enjoy more freedom to focus on finding great deals and making offers that work for you. Instead of constantly feeling the pressure to provide updates or constantly looking over your shoulder, you can operate more independently. While utilizing O.P.M. may not be perfect, it is certainly an excellent way to jumpstart or elevate your real estate business.
In conclusion, leveraging O.P.M. – other people’s money – is a powerful tool in real estate investing. By tapping into private or hard money sources, you can access the capital needed to grow your business and increase your overall success. Don’t let the naysayers deter you; embrace the possibilities that O.P.M. offers and watch your real estate ventures soar.
This article is brought to you by Garrity Traina, a trusted name in real estate.