What are top 3 pitfalls to avoid when using OPM?

Question

What are top 3 pitfalls to avoid when using OPM to fund a deal?

What should I consider as method of repaying the investor whether I should provide equity stake versus % return on money invested?

Theo Hicks · Answer

I think the biggest pitfall is lack of transparency.

To avoid this pitfall, send monthly recap emails to investors for each property. If a problem arises, identify the right solution as quickly as possible, and communicate the issue and the solution to your investors in the recap email.

Kenneth Garrett · Answer

@Chris Braudis Jr

I like Debt partners where you pay a fixed interest payment.  This makes the most sense to me.  Last year I paid out between 70K and 80K in Interest.

The most critical thing when using other peoples money is communication.  I send a monthly update to inform my investors what has occurred over the last 30 days.  I think this creates good communication with your investors.

Chris Braudis Jr · Answer

@Aurelien Bonin Couldn't agree more! Thank you for the article, this was a good read.

Chris Braudis Jr · Answer

@Greg Dickerson Really appreciate your input and insight for using simple interest preferred returns. Many thanks!

Aurelien Bonin · Answer

@Chris Braudis Jr

Using other people's money has to do with relationships.

I would try to pay interest when possible because it means you own the asset yourself.Like David Greene says in an excellent Forbes article: if you keep growing you will have to bring in partners, equity partners, until then: pay interest! https://www.forbes.com/sites/davidgreene/2018/11/18/the-top-seven-traits-of-a-a-successful-real-estate-investor/#855db89378a6

I personally started bringing in equity partners and have to say that, so far so good: my partner is very hands-off, that way we don't have too many chefs in the kitchen.

Greg Dickerson · Answer

@Chris Braudis Jr Return structures are totally up to you and your investors. There are a number of ways to structure deals and returns. I like to use a simple interest preferred return whenever I can and stay away from equity place.

Pitfalls are responsibility, accountability, and the potential of losing somebody else’s money. These are the risks associated with using other peoples money.

What are top 3 pitfalls to avoid when using OPM?

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