Ways to Fund Your U.S. Real Estate Investments Using OPM (Other People's Money)
Wouldn’t it be nice if you could fund your investments without using any of your own money? It almost sounds unrealistic, but truth be told––it’s not. There are ways that you can structure and execute deals using other people’s money only. However, don’t think that this means you don’t have any work to do. In reality, investment partners may specialize either in the financing aspect of the project or the daily management of it. There may also be cases where you are the one to locate and present certain opportunities to other investors too, in which the following advice also applies.
To start things off, what type of financing will you seek?
First, you must decide between a debt or equity source of financing. As I’m sure you are already aware of the difference by now, a brief explanation of the differences between the two options can be a helpful reminder. Equity financing comes in the form of sharing some of the ownership and thus, profits with your partner. Debt on the other hand is merely a financing tool in the form of a loan-like credit. In this case, you pay regular interest payments to the creditor but do not release any ownership beyond your own hands.
These are essentially customizable between you and your equity partner(s). It requires lots of negotiation to arrive at fair cuts and rules based on the contribution of each party. Often, these are structured through deals with silent partners where one party provides the financing, while the other runs the operations.
Debt financing can come in the form of a line of credit, a lump sum loan, or a loan that is released in stages. You must be very careful to abide by all of the clauses tied to the loan agreement. A violation of one of the terms or conditions could lead to the credit being revoked.
Unfortunately, you’re not getting off easy––you’re still going to have to sell your case for both options.
Regardless of which option you choose, there are some helpful tips that you should keep in mind when presenting your investment case. Remember, they need to believe in the idea as much, if not more than you do since you are asking them to put money on the line. Not only that, but investors will also consider you as a businessperson so be sure to stay sharp and prepared at all times. You really need to sell them on your idea since after all, you’re asking for significant financial backing. Keep these tips in mind:
Establish your experience in the market. One of the best things you can do right off the bat is to establish your history and experience in the real estate investment arena. Show them what you know by providing a carefully detailed plan of the investment opportunity and leave nothing up to guessing.
Show that you have skin in the game too. Your investors need to know that you are willing to do what it takes. Often, this can be done by showing them that you have something to lose as well. It will help to provide a more convincing case that you will stay motivated throughout the course of the project, especially when the going gets tough.
Have an exit plan. No one likes feeling like they’re tied up in something. It’s always good to have an exit plan and one that is very specific at that. Again, don’t leave anything up for guessing.
Consider risk and contingency plans. You must be able to acknowledge if and when the project is going south. Without these indicators, you will not be able to convince investors or creditors to continue funding a bottomless and fruitless project.
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