To a middle-class worker with a moderate income and limited assets, the notion of investing in real estate seems far-fetched: something reserved for folks in the upper crust. Those people often say things like “It takes money to make money.”
But have you seriously considered whether this is actually true? If you do some digging, you might discover this is nothing more than a myth that discourages regular Americans from getting in the game.
Real estate investing is a viable option for many people … including those who aren’t yet wealthy.
If you don’t have a ton of money in the bank, you’ll find it difficult to invest in real estate at a scale that builds instant and substantial wealth. You’ll need at least 15 percent (and likely 20 percent) to get a traditional mortgage on a property you don’t plan to live in personally.
Even if you’re buying cheap properties — say $100,000 size — you’ll need at least $15,000 in cash per item to get started. To someone who draws only a moderate income, this level of “spare change” can take years to save; and if you want to generate real wealth with land and buildings, you’ll have to do it 10 or 15 times before you’re liable to see significant income.
Thankfully, you don’t have to rely on your own money to invest in real estate. If you’re willing to get creative, other opportunities are out there.
Robert Kiyosaki, financial guru and author of the best-selling book Rich Dad Poor Dad, loves to talk about the concept of OPM, an acronym that stands for “other people’s money.” In terms of real estate and business, he believes using OPM at scale is the secret to building wealth where none has previously existed.
“There are two ways to get rich. One way is to use your own money. The other way is to use other people’s money, or as we call it at Rich Dad, OPM,” Kiyosaki writes on his blog.
“One (using your own money) provides small-to-modest returns, takes a long time to pan out, and requires some financial intelligence. The other (OPM) provides large-to-infinite returns, creates incredible velocity of money, and requires a high financial intelligence.”
For the majority of the population that doesn’t have the means to self-fund real estate investments at scale, OPM is the solution for building wealth. If you’re willing to get creative, it’s a solution that could be available to you.
There are a number of ways to employ other people’s money. Depending on your experience, connections, talents, skills, and willingness to absorb risk, you may find any of the following useful.
Seller financing is one of the most common forms of OPM. In this situation, the current owner of the property transfers the title to the buyer along with a private mortgage or deed of trust. A promissory note that outlines the terms and conditions is also included. This note stipulates that the buyer now owes the seller the remaining principal balance.
If you have a broad personal or professional network that includes friends, colleagues, or family members with deep pockets, you might be able to raise money from individuals and pool these resources to pay for your investment. Private money typically comes with strings attached, though — including higher-than-average interest rates.
Similar to private money, hard money can be used to cover a short-term loan. With this strategy, you find private lenders who specialize in lending sums to investors. You present your investment opportunity to them, and they draw up the terms. Typically, hard money loans need to be satisfied within six months to a year. They also tend to be more expensive than other forms of lending.
If you’re willing to put in some sweat equity, time, and talent, you could find an investor who is willing to fork over all the money and become a 50-50 partner with you. The classic example is a house flip, in which one partner provides the capital and the other does all the repairs and marketing.
Finally, you may be able to barter with people in order to obtain financing for a deal. This is especially common among real estate investors who own a business that offers a particular service. For example, if you own a landscaping company, you may offer to landscape all 15 of someone’s rental properties for free in return for a loan to buy your own rental property.
Although OPM can be a great source of financing for real estate deals, it’s not a risk-free approach. As with any type of investment, you’ll still face a number of challenges. The key is to weigh the pros against the cons and to be honest with yourself.
As a real estate investor using OPM, you’ll have to make sure you’re disciplined enough to live below your means and consistently pay down your debt according to the agreed-upon timetables. Failure to do so could lead to your defaulting on the terms of your agreement — which could result in the seizure of an asset, or a lawsuit.
It’s also vital to remember that OPM puts your reputation on the line. People have placed their trust in you, and you can quickly sully your reputation by failing to follow through. This can kill your chances of negotiating future opportunities.
When you hear people use the term OPM, you may also hear them drop another acronym: OPT. It stands for other people’s time, a concept that goes hand-in-hand with the one we’ve been discussing.
When you learn how to leverage OPM and OPT — which tends to occur in the form of smart hiring and outsourcing — there really isn’t any cap to your potential as a real estate investor and wealth builder. You can live life on your terms and still reap massive financial rewards.
At Green Residential, it’s our primary aim to help Houston-area real estate investors and landlords maximize their time by taking over the responsibilities that come with property management. For more information about how we can help you, please contact us today!
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