Private Money: The importance of using other people’s money in real estate

Suppose you have $50,000 in cash and you are looking to do something with it. All things being equal, would it make more money to invest all $50k into one deal, or invest $10k into 5 different deals? Leveraging other people’s resources to allow you to do multiple deals rather than putting all of your valuable eggs in one basket should allow you to receive greater returns!

Do you think wealthy real estate moguls such as Robert Kiyosaki, Donald Trump, or Dolf De Roos use their own resources when investing in real estate? Absolutely not! They have made the bulk of their fortunes in real estate using funds that are not necessarily their own.

“Getting back to the difference between a saver and an investor, there is one word that separates them and that word is LEVERAGE. One definition of leverage is the ability to do more with less.” – Robert Kiyosaki Why We Want You to be Rich

These resources include but are not limited to Other People’s Money (OPM), Other People’s Credit (OPC), Other People’s IRAs (OPI) and other People’s HELOC (OPH). This article will focus on ways to utilize Other People’s Money.

There are 2 ways to use OPM in real estate investing: either as money partners or as private lenders. Money partners’ role is to provide funds for the deal. They receive a portion of the overall profit in the transaction (but not a guaranteed rate of return).

Private money is the process by which you, the investor, borrow money from a private individual (as opposed to borrowing from a financial institution or ‘hard money’) and use the money to invest in real estate. The private lender is not your partner in the transaction, but rather receives a fixed rate of return. When the investor receives a profit from the transaction, a portion of the proceeds pay back the lender’s principal plus interest while the remainder goes into your pockets as profit.

The first step in raising private money is to determine how much money you are trying to raise. Once you have figured that amount, then you need to find people to loan you the money.

Why would someone lend you private money? Well, look at the alternatives. If you have an associate who is keeping $100,000 in a bank account, cd, or retirement plan, chances are he or she is only earning 2-4% on their money. But if they would be willing to bank and the First National Bank of You, you could pay a return of 6-8% on their money, backed by real estate, and give them an increase on their return of 150 – 400%!

Who are potential private money lenders? Anyone on your contact list from friends, family members, neighbors, coworkers, doctors, attorneys, etc. Don’t be afraid to ask! Some of our best private lenders come from people you least expect.

How do I approach potential private money lenders? There are several ways. First, you may wish to have a frank discussion where you explain what you are doing and what you are looking for. Or, you could use a gradual approach, where you drop in hints here and there about needing money until you finally ask them (or get them to ask you). You may send out periodic e-mails about your investing opportunities and see if people respond.

Remember, when sending out any printed form of advertising trying to find funds, do NOT say things like ‘Guaranteed returns’ or advertise a specific rate of interest. The SEC tends to frown upon such activities. When putting any advertisements in print, it is best to seek guidance from an attorney.

What do I do when someone is interested in lending me private money? The first step is to find out what rate of return they are looking for. Your personal rate of return may be 18% and you may have even budgeted an 18% return for this project. But that doesn’t mean your lender wouldn’t be satisfied with a smaller return, say 12%. Always ask the following questions:

* “What rate of return are you currently earning on the money you are looking to lend?”
* “What rate of return would you like to be earning to make it worth your while?”

Remember, someone currently earning 2% on $100,000 would probably be thrilled to earn 10% on that same money. So don’t blurt out 18% or you will fail to maximize your own return.

One other bit of advise: Try not to make payments during the loan. IF the lender wants payments, you can offer a lower interest rate. But be flexible as different lenders want different and unique arrangements. Also, lenders may want interest only payments, but see if you can get them to accept payment quarterly or annually instead of monthly. There are no set rules as to how you must repay so be creative and find a mutually beneficial arrangement.

Finally, don’t get hung up on your own personal experience or credentials. First, if the deal is good and the return is strong, your experience may not come up. If it does, look to partner with someone else who does have experience. You may have to share the profits, but if that gets you started and allows you to do future profitable transactions, then this investment may be the strongest one of all!

If you enjoyed this article, please visit www.REMillionaireBlueprint.com for more