OPM (other peoples money) and leverage

2 Replies

My question is about OPM (other peoples money) as far as what it means and specifically how it can be utilized in a real estate investors benifit? Also when it comes to leverage what is a good example of it and how should this be practiced?

@Quentin Noah These are some loaded questions that will get you responses from all kinds of different camps. Briefly, OPM is used to an investors benefit because it removes the limiting factor of personal capital in acquiring properties and allows you to increase the speed of investing and "reduce your risk" by not putting your own money on the line.  Having said that, using OPM means you will need to have a way to pay them back (usually in a short period at higher interest rate) or will be giving away equity share in the property in exchange for their money. Can be very helpful and a great tool to scale up quickly, however, it comes with its own risks so make sure you know what you are doing and have contingency plans to pay the money back if things don't go according to plan. 

As for leverage, the more you finance a property the more you leverage it.  For example, if you put 3.5% down a property and finance the other 96.5% that is a highly leverage property.  It allows you to put minimal capital into acquiring a property and you can scale up way faster with higher returns, but it also leaves you more exposed because you have minimal equity in the property, lower cash flows, and less ability to adapt to the market.  Most lenders require you to put down 20-25% to limit leverage and ensure you have enough skin in the game.  More leverage = faster scaling, higher returns, but more risk.  It's a double edge sword.