How To Invest in Real Estate Using Other People's Money?
Investing in real estate has been a life-changing investment vehicle for many people. Many investors can scale to multi-million dollar real estate portfolios without even using their money.
That is right!
Having the ability to own a property without having to put much, if any, of your money into the property is just one of the benefits of investing in real estate. This is called leverage. Using other people's money offers a unique opportunity for both the investor and the lender to make a significant profit along the way.
Granted, using leverage is a double-edged sword and can be very risky if you are not an experienced investor or not in a place of financial strength. You must be aware that there is always a potential that you may lose the money that you borrow from someone, so you must be able to handle both the positives and negative aspects of leverage.
With that being said, if you plan to invest in real estate using other people's money, here are some strategies that have worked for other real estate investors in the past.
Use Hard Money
Hard money lenders are individuals or a group of individuals who can offer a loan for your investment property. Hard money lenders are interested in the success of the investment property you are looking to purchase or rehab you are trying to fund.
When considering a hard money loan, you must understand how to analyze an investment property and know what makes a good real estate investment deal. If the real estate investment property is not a good deal, the hard money lender will not fund your investment property.
Even for people who have bad or no credit and have a good deal, the hard money lender will move forward with the loan and may just charge you a higher interest fee because of your credit status.
The greatest downside of utilizing hard money lending is that it is expensive and uses your investment property as collateral if you don’t pay back your loan.
Typically hard money loans can have an interest rate of 10-18%, which is very expensive compared to the average conventional loan rate in 2020 of 3%. If you fail to pay the loan back, the hard money lender will take full ownership of your property.
Private Lending
Using private money lenders can be another reasonable resource to help fund your investment property using other people’s money.
Private money lenders are usually people or a group of people who are looking for a return on a real estate investment but choose not to actively invest in real estate.
This may be an individual who has a lot of money and doesn't want to take the time to learn about real estate investing but would like to invest their money in the asset class.
Like hard money lenders, private money lenders are looking at your investment deal’s quality and value rather than your credit score and history.
Usually, because these are independent entities and don't have to adhere to regulations and corporate policies, they are willing to negotiate the loan term, interest rates, and truly anything else within the real estate deal.
Seller Financing
Seller financing or owner financing is when a buyer finances a property directly from the seller of the property. This financing offer is extremely flexible because, in most cases, no bank or government requirement must be met.
Depending on the seller, seller financing will allow you to work out how you would like to acquire the property while disregarding your credit and financial status. The biggest caveat is that the seller has the final approval of the financing for the deal.
Typically, you and the seller identify the ideal structure for the down payment, interest rate, and loan term based on both of your needs.
Once you and the seller have come to an agreement to buy the property, you both will sign a promissory note detailing all the terms of the loan the seller created for you. If you, the buyer, defaults on the loan, the seller still holds the title and full rights of the property.
Partnerships
Developing a partnership is another great way to use other people’s money to acquire a piece of real estate. Typically you will want to find a partner who has the skills or resources that you are lacking. In this case, it would be money!
You can structure your partnership any way you and your partner see fit. Keep in mind that you must truly bring value to the partnership, or no one will want to partner with you.
It would be a smart idea that you have a set of lawyers to help write up a contract related to the agreement set by you and your partner. Having a partnership with someone who has a lot of capital can be a very profitable investment strategy; however, many other difficulties can come up in a relationship between you and your partner if expectations are not clearly set in the beginning.
In Summary
When investing in real estate, it's been proven in the past that you don't have to only invest using your money. In fact, many investors can receive better returns over time when they are consistently using other people's money responsibly.
Like with anything else in life, it takes time and practice to become proficient at using others' money on your real estate investment deals. One of the great things about this is that as you become more skilled and experienced with using other people's money for your real estate needs, more people will be willing to offer you and lend you money in the future.
Whether you are using hard money lenders, private lenders, seller financing, or forming a partnership with another investor, you should always ensure that you are investing from a position of financial strength and you understand the risk you were taking on as you leverage someone else's money.