We like money and lots of it. Especially when our money goes out and can make more money for us! Investing is the number one way to achieve this. How to use money in your real estate business. Money can be used in different ways when you are working in the real estate industry. For example, it can be used to purchase homes, to hire a real estate agent, or to cover other costs associated with the sale or purchase of a home. This is the standard way of answering this question.
But what if I told you there are many ways to use money in real estate that you have not even considered? You may have a nest egg or liquid cash to buy a property with no financing. Great! What if I told you that most successful investors like to keep their cash in their pocket and use Creative Financing or OPM? That’s right, Other People’s Money. A term used in reference to financial leverage/strategy that can be used by individuals and corporations. Of course, it comes with a cost. Interest rates, maybe an origination fee, hard money lender fee, and so on. There is usually always a cost to borrowing money, and that’s ok, if your return on investment (ROI) outweighs your cost. In this article we will take a glance at different ways to use money, especially using OPM.
There are many ways to source money for your investment strategies. Here is a list of ten. We will go through and talk about some of them and show you how they work in real estate.
When you find a deal, and need capital, which OPM method would you use? First, look at what type of deal and/or strategy you are using and how much capital is needed. Once you have the amount in mind now you can choose how you are going to leverage.
Let’s talk about credit cards, peer to peer lenders, and unsecured personal loans. These examples of OPM are a quick and easy way of getting your deal funded. What is the one thing they have in common? You guessed it, potentially high interest fees. We say potential because it all depends on your credit profile. Everyone is different. Now don’t let that scare you. Depending on the deal, you might need fast money to get the maximum return on your investment. With credit cards you can access the funds with a cash advance check offer. Please check all the terms and conditions with your credit card provider to know exactly what they are, and how much is allowed to withdraw. With the cash in hand, you can use it however it best fits your deal. For example, you live in an area where you found a fix and flip property for $30,000 and used the credit card cash withdraw. The total repairs come to $10,000 which equals $40,000 in your total investment. You’re thinking oh my, the interest in this will be insane! You have done your homework on the property by running all your numbers before you signed the contract to buy and know you can sell it for $60,000. You sell within 6-12 months and make a $20,000 return! Not bad for quick money.
You can do the same with Peer-to-Peer loans. Peer-to-peer lending, also known as P2P lending, is the practice of lending money to individuals or businesses through an online service that matches lenders with borrowers. It has a quick, easy application to see how much you qualify for. When using P2P, personal loans, or credit cards, look for unsecured loans. Meaning they are not backed by an asset and based solely on your credit profile. An example of a secured loan would be a car loan, the car is the collateral in which can be repossessed if the loan is not paid. Same with a mortgage. The house is the collateral to the loan and the bank has the right to start foreclosure if the note is not paid by their terms agreed upon. Fixed interest rates are important as well when investing, that way you know your monthly payment is the same steady amount during the term of the loan.
Investment property financing can take several forms, and there are specific criteria that borrowers need to be able to meet.
With conventional financing, the typical expectation for a down payment is 20% of the home’s purchase price. With an investment property, however, the lender may require 30% of funds as a down payment. Your personal credit score and credit history will determine your ability to get approved as well as what kind of interest rate applies to the mortgage.
Hard money is fast cash, non-conventional or private financing with private funds. Since hard money loans are not backed by governmental safeguards, the stringent guidelines and documentation required are absent.
How Private Loans work is a promissory note will replace the contract and this note will outline all the stipulations and details to the loan. A lien is then placed against the property for collateral for the loan until borrower has paid the loan back. Like hard money lenders, there are fees associated. When looking for a private loan make sure to do your research.
Home Equity Loans enable you as a homeowner to borrow money by leveraging the equity in your home. The loan amount is spread in one lump sum and paid back in monthly installments. The loan is secured by your property and can be used for whatever you like. Maybe to consolidate debt, home improvements, education, or purchasing a vehicle. Both the interest rate and monthly payments are fixed, ensuring a predictable repayment schedule. They are also known as a second mortgage.
Return on investment measures how much money, or profit, is made on an investment as a percentage of the cost of that investment. Different investments have different rates of return. For a rental property, the rate of return can vary a lot depending on whether you finance it with a mortgage or pay for it in cash. As a rule, the less cash you put down on the property, the more money you will owe on the mortgage. But your rate of return will be higher.
You must have urgency because time is important. We all know this. Time is important when you are working in the real estate market. This is because timing is one of the things that can help us get a good deal for our clients. Sometimes, it can be the only thing that helps us make a deal fairer. It is important for any real estate investor to understand the concept of the time value of money because it affects how much future cash flow from a real estate investment is worth today. When you take a mortgage to buy an investment property, the time value of money equation calculates how much all the payments you will need to make over the term of your mortgage are worth today.
We have talked about creative ways to finance using OPM and traditional loans and understand how to leverage these ways in your strategies. Either way you decide how to leverage a deal, know that there are many ways as well as learning about the timing of it all to get the maximum return. We can teach you all these strategies and more! It’s about perseverance and proper education. You can do anything you put your mind to! Let us show you the way to leverage your deals. Remember… It’s not about the cost of money, it’s about the return!
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