OPM & Profitable Partnerships
Maximizing Profits through Smart Collaborations and Financial Leverage
OPM other peoples money.
As the old saying goes, “It takes money to make money.” While this is true for every business, there is a very important detail that is often overlooked:
It doesn’t have to be your money.
That’s right—you can use other people’s money (OPM) to start and grow your business. In fact, many successful businesses are started by using one of the OPM sources outlined in this report.
What about real estate? Real estate is a capital-intensive (a fancy word for money) business. You will need capital to acquire property and add value.
Can you build a real estate investment business using other people’s money?
Absolutely! There is no reason you cannot invest in real estate with little or no money of your own. The only requirement is that you know where to look for money from others.
Not having a pile of your own cash shouldn’t stand in your way if you want to be a successful real estate investor. However, one of your first tasks is to get past any misgivings or doubts about why others would allow you to use their money for your business.
There are sound incentives for others to allow you to use their cash to buy and sell real estate. They may lack the knowledge to invest in real estate but have cash they want to put to work.
Returns on savings deposits are extremely low, making real estate returns and security look enticing.
Cash can be accumulated, but there is only so much time available, even for the rich, who may not have the time to devote to real estate.
There may also be a mandate to do so, with government programs tasked with putting money to work in redevelopment or funding real estate investments to improve lives or communities.
There are also great tax advantages when using retirement accounts to invest in real estate.
Here’s the important part for you:
Your challenge to success isn’t that you may not have the cash to buy and sell real estate. Your only challenge is to locate people and resources with money to invest, then develop relationships for mutual profit. This report is a great start in getting you knowledgeable about raising capital.
The two faces of OPM
From the corner lemonade stand to the biggest Fortune 500 companies, OPM always comes in two forms: Debt and Equity. Your real estate business is no different. You will use a combination of debt and equity to fund both the birth and growth of your business.
The person with the money providing a loan is called the lender. The person providing equity is called the investor.
Debt
Debt is often seen as a bad word by many people. This is unfortunate because debt can be a very powerful way to use OPM to create success. The problem is that most people think of consumer debt, which is typically harmful. Here, we are talking about business debt, or more specifically, debt that produces income.
Debt’s impact on your life quickly changes from negative to positive when you use it to buy an income-producing property instead of a new big-screen TV. This way, your debt payment is covered by rental income, with extra cash for you.
For real estate investing, we call this type of debt “hard money lending” or “private lending.” The borrower will not give up any equity or ownership in the property. Instead, they will pay a debt premium, measured as an interest rate, to the lender for the use of the money. We will discuss borrowing further in this report.
Equity
Equity can be described as “ownership.” In this case, someone trades capital for a portion of ownership in the business. Some businesses are 100% funded by the capital of one person (the investor), while others are funded by the capital of thousands of people (investors) around the world.
Equity can either be private equity or public equity.
When starting a lemonade stand, you would likely have one investor owning the entire business and using their private capital to start the business (buy supplies). This is private equity.
In contrast, with a Fortune 500 company, you will have many investors contributing their capital through a public market, such as the New York Stock Exchange, in exchange for a portion of ownership. This is public equity.
As real estate investors, and in this report, we focus primarily on using private equity to fund our business. You can use all your own capital and own 100% of the equity in the property.
Or, you can use another person’s capital and give them a percentage of the equity in the property. This way, the investor will share in the profit (and the loss) of the property. Since this is a private transaction and not listed on public markets, we call this capital investment “private equity.” A private equity deal can occur between two investors or multiple investors. The combinations to raise capital with this method are endless.
The business relationship is often called a ‘partnership’ and can apply to the entire real estate business or just one individual property. We will discuss profitable partnerships in this report.
Investment strategies
There are several real estate investment strategies that lend themselves well to the use of other people’s money. Almost any strategy can use OPM since the source of the funds doesn’t matter as long as they’re available. However, some strategies work especially well for newer investors or those with experience but no cash for deals.
Simple Wholesale Deal
A simple wholesale transaction involves purchasing or locking up a property and flipping it to another investor without doing any renovations. Obviously, with enough cash to buy the property outright, you can purchase it and sell it to another investor immediately for a profit.
Using our marketing strategies to locate sellers, you can negotiate a deal for purchase well below the current market value and still have room for profit when you sell it to an investor at a bargain price that fits their investment plan.
OPM opportunities are great for wholesaling since investors with cash are attracted to fast, secure returns. If they can fund a $95,000 purchase and you can turn it over for a $125,000 profit, paying them anywhere from 2% to 5% for the use of their money for a few days, they are happy, and so are you.
Double closing
This is essentially a wholesale strategy where the buy and sell closings are scheduled hours or a day apart. You are still wholesaling to another investor, but you’re doing it with a tight schedule and the cooperation of the closing agent (which could be a lawyer, title company, or escrow company depending on where you live) to fund the buy-side with funds from the sell-side transaction.
With the mortgage crisis that hit hard in 2008 still influencing lending and closing agent policies, the double close has become more challenging. Most closing agents will refuse to fund one deal with the proceeds from another closing, even if they occur minutes apart.
Using OPM to fund the buy-side deal, you can have the OPM source listed in the closing settlement sheet for the sell-side deal so that they are paid back at closing, leaving the balance after closing costs as your profit.
Rehab & Flip
Selling to long-term investors who want income properties can be a very profitable investment strategy. Buying properties in need of work or major rehab and completing that work can provide some of the highest profit margins in real estate investment.
In this strategy, the need for OPM is short to medium-term, ranging from a few weeks to a few months while the work is being done. The funding pays for the purchase and/or the rehab work, and the resource is paid off when the property sells.
Money Sources
Long Term Funding
OPM can be a major resource in long-term investing in rental properties as well. Conventional mortgages are usually preferred for longer-term funding, but with lending regulations continuously making it more difficult to buy an income property, working with an OPM resource can get deals done that wouldn’t be possible otherwise.
When we discuss profitable partnerships later in this report, you’ll find that rental property ownership partnerships can work well for you. However, if you want to own the property outright but need OPM funding, you can get private money on a longer-term basis. Perhaps a two-to-five-year loan with a balloon payoff at an attractive interest rate can get you that OPM funding. This gives you time to acquire conventional financing later.
Family & Friends First
Forget the old advice that you should never borrow from or lend to friends or family. Forget this because you’re not going to be doing either.
Once you’re out there putting together deals and taking profits to the bank, you have demonstrated your knowledge and ability to make money in real estate investing. Before you go out and leverage strangers’ money to put profits in their pockets as well as yours, you owe it to your family and friends to allow them to invest in something they cannot get elsewhere.
Some of the first people who will know about your knowledge and success will be your family and friends. Don’t be in the position of being asked why you didn’t let them in on a great deal when they’re only getting under 2% CD or GIC returns on their savings.
Hard Money & Private Money Lenders
For short-term OPM funding, especially for wholesale deals, double closings, and other flips, hard money and private money lenders can be very helpful.
Generally, hard money lenders are businesses (non-banks) where lending capital is their core business. Private lenders are everyday people with extra cash who want to get a better return than they are currently receiving (family, friends, etc.).
The business model of hard money lending companies is to fund short-term real estate deals for high profits. Their fees and interest rates are higher than other forms of funding, but they are often the only resource available to make a deal happen. If you’ve structured your deal with enough margin for their fees and still a good profit, hard money is an OPM resource you’ll be glad to have.
Private money lenders do not necessarily have a formal investment plan nor are they always organized like hard money lenders. They are private individuals or partnerships with a desire to do short-term investing for higher-than-average returns.
Transactional Funding Companies
When you are doing double closings, a transactional funding company can be your best source of OPM funding. Their fees are high, typically between 1.5% and 3% of the amount loaned.
The transactional lender funds the buy-side deal by providing the money needed to the title company to close the purchase. The transactional lender is listed on the settlement sheet for the sell-side deal, so they’ll get their money back at closing. It’s their business, and you can find these companies with a simple internet search. If you structure your deals properly, they’ll be happy to fund them.
Government & Community Funding
Every investor should spend the time necessary to research and keep track of local, regional, and national government programs that provide funding assistance for home purchases and rehab. Every locality is different, and government programs provide grants to localities to use in the development and improvement of properties, especially for low-income housing.
Profitable Partnerships
There are many successful real estate investors who have remained a one-person show. They reach a level in their investing business that suits their abilities, time, and income desires, and they cease to grow beyond that level. There’s nothing wrong with that.
However, far greater and more rapid growth is possible by strategically using partnerships for profit. Some partnerships are solely for funding reasons, but many times they’re also for time and resource goals. Two people can do twice what one can, and more than two people can leverage even better results.
Partnership isn’t a decision to make lightly or without careful research and planning. Partners must get along and have compatible goals and ethics. Short-duration partnerships can be less carefully researched, but great care must be exercised in longer-term relationships.
Short-Term Single Deal Partnerships
Usually for funding reasons, you can choose to partner with someone for a single deal when you need OPM. Instead of paying a transactional lender or hard money lender their fees, you can take on a single transaction partner.
This can be done very loosely, with a single written agreement for the deal that dissolves your relationship after closing and fund dispersal. It’s very similar to private lending, in that you get the funds to make the deal happen from a private source. And while it could reduce your profits per deal (since you will usually have to give up more in a partnership relationship), it can make the deal possible.
However, when working with family, friends, or individuals who are risk-averse, they may want a higher return on their short-term funding, and a partnership of some sort may be more appealing to them.
Ongoing Multiple Deal Partnership
One extremely successful young investor focused on building knowledge and marketing, which put him in frequent situations to do highly profitable flip deals.
After one successful deal with a private investor who funded a wholesale flip, the investor presented a partnership approach to work together in an ongoing relationship. The offer was accepted, and these two went on to do more than 30 deals in the next couple of years, all highly profitable for both.
They chose to do a simple agreement for each deal rather than a long-term legal partnership. This worked well, as the deals turned over quickly, and there was no expectation of long-term ownership.
Long-Term Rental Property Partner Owner
In the previous example, the young investor’s business continued to develop, and he decided he wanted to own properties for rental cash flow. His first rental property deal was a partnership with a parent. His father had a significant amount of money in savings, but the interest rate he was earning was far from exciting. After seeing his son's success in real estate deals, he wanted to partner on a rental property to receive a solid monthly cash flow and grow the value over time for his retirement.
They partnered in the purchase of a home for rental, with a 50-50 split of the property’s income and long-term appreciation. The positive cash flow for the father, even at half, was four times what he was receiving from interest on the money he took out of savings. The son contributed his expertise, time, and management of the property for his share.
This was just the beginning for the young investor. He returned to a single-deal partner from a previous example and pitched the idea for a more structured long-term partnership to own rental properties. They became partners and have since become very successful.
Investment clubs or groups
A young, newly married couple was working to get their real estate investing business off the ground. Part of their learning strategy involved joining an investment club. They hoped to make contacts, learn, and build investing relationships.
One day, a local builder/developer associate member of the club mentioned that he was looking for short-term funding to develop a large parcel of land into single-family lots. The club members saw potential and pooled their resources to become the sole investor in the development.
This was a large investment club, and the members managed to pool together $8.7 million. They loaned this to the developer for the land purchase and development of the lots, streets, and utilities.
It was an eight-month loan, and the club knew that even if the developer defaulted, the value of the property would exceed the money they had loaned. The developer couldn’t get funding elsewhere, so the interest rate on the loan was 50%.
Our young couple invested $26,000 and received $39,000 when the loan was paid off in full at the end of the eight months. This is an excellent example of finding partners in unexpected places and profiting from the relationship.
Full Partnerships or Business Structures for Long-Term Growth and Expansion
This report shares information and experience from Chris Marchese and SET Ventures, a real estate investing partnership that has built a significant real estate business since purchasing its first rental properties in 2008.
SET Ventures is an excellent example of a partnership that developed organically. Their abilities complement each other, covering all facets of growing a real estate investment business.
Growth Through Structure & Diversification
Partnership doesn’t have to be limited to people with common goals and interests in real estate investment. It can also be a growth strategy based on bringing in-house functions that were previously outsourced to contractors or other service providers.
As a business grows and accumulates properties, both residential and commercial, property management becomes a major function. The same is true for building, remodeling, and repair contracting. The more properties you own, the greater the time and money required for these activities.
Partnering with contractors or other service providers you’ve been working with over time may be your next growth phase. Creating a corporation or multiple companies under one umbrella is a profitable strategy. There are tax and liability advantages that your accountant and attorney can explain, but they are definitely worth investigating.
You’re in Charge — Grow Your Way
Using Other People’s Money (OPM) and forming Profitable Partnerships are two methods that have propelled many of the largest and most successful real estate investment businesses to their current heights.
This report has provided you with information that will allow you to decide how large you want your business to become and how many other people, if any, you want to involve.
Knowledge is power, but only if you use it. You’ve just increased your real estate investment power considerably with the knowledge from this report!
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See you next time!
Chris Marchese
Founder of SET Marketing
"Maximize financial leverage and drive business growth with these proven OPM strategies."