When starting out in a real estate investing business, you will have to consider several things. It is never a good approach to success to enter into any business venture prematurely and without proper planning. You will first have to learn as much as you can about the business before jumping in and doing deals..
Depending on how your business is financed, buying and selling these properties may involve very little or a lot of money. One good way to leverage your interests is to employ the use of other people’s money and resources. If you are lucky enough to have some assets, in a pinch, you can also leverage them too- if the deal is lucrative enough.
Most people think that success in this field of business involves only hard work. While we will agree that hard and focused work is an essential element to success, having good knowledge and a good team of people surrounding you is also very important. And if you are to succeed, you will need to utilize them appropriately.
Good investing strategies can help your success when you understand how leveraging can make dealing with many types of real estate a lot easier on your budget.
One method is to get other people‘s money to work for you. You can possibly earn more income with proper leverage than if you try to “go it alone”, plunking down your own cash on a deal. Who, in their right mind, would ever hope to get good returns on investments when he or she hasn’t put a lot of cash into a deal? Is it truly is possible to get other people’s money, time, and expertise to work for your own benefit? The answer is a solid “Yes!”
Leveraging Other People’s Money, Credit and Assets
One thing that you will have to be aware of is how to choose potentially great properties. You also need to have a total understanding of what your back end buyer (in this case a rehabber) is looking for in a property, its location, fix-up costs and price.
If you do this, you will have effectively used other people’s expertise and time in helping you make a good profit.
One way to think of OPM (Other People’s Money) working for your benefit is to consider how most people expect to make a profit from their real estate ventures.
The first thing that most beginning investors consider is how to purchase the property itself. They can do this through couple of different techniques. The first technique is that they can purchase the property out of their savings or take out a loan or loans to pay for the property.
This method, while it has some merit, also has some limitations. If you use your own savings to buy property for a venture – and for some unforeseen reason, the venture goes bust and you are unable to sell the property right away, then you may have used up cash needed for other potential deals. As a backup exit strategy you can possibly rent out or do a lease option on the property and still make an eventual profit, but your cash is still tied up into the deal.
A second, and more solid strategy, is that you can make other people’s money, credit and assets work for you here. Instead of paying all cash- what if you convinced a property owner to sell to you with just a little cash down (for this example- let’s say 5% down) and with seller financing? This means you only initially pay for around 5% of the property’s value- but you control the property! Then, you proceed to fix up and sell, lease option or rent the property to a back end buyer or tenant. The money you make from the sale, lease or rental can be used to pay for the loan.
In the end, you would have only paid 5% cold cash for the property, and made the property itself – with the help of its buyers or tenants – pay for the property If the property costs $100,000, then that means you only pay $5,000 to own the property after some time – with extra income to boot. Not a bad proposition now, is it?
Having other people pay for something you will own in the future, or having a seller carry a good part of the purchase is one of the smartest and effective ways to make investments. It allows you to do more investments- thus the chance to earn more profits. Because you are minimizing or eliminating some costs (such as some hard money or other lending costs) and have less money into a deal, in some cases you may be able to offer the seller a higher price on the property.
You could also use other people’s resources such as time and expertise when trying to make money from fixer upper homes. If you aren’t well-versed in renovating properties, why not wholesale it to another investor, have them do the renovation and you both make a profit. In the end, you will have made a small profit with little risk. The folks that do the remodeling, renovating, and marketing will make a larger profit, but they will have more time, effort and risk in order to do so.
A great way to invest is to leverage other’s assets to work for your advantage. An example is if you wanted to buy a property and needed to qualify for a loan, but couldn’t. You could get a credit partner and cut them in on monthly cash flow, part of the deal on the back end or both- if the deal was structured that way.
You can also get a money partner in order to furnish you with all or part of the cash needed in order to fund a deal and bring it to fruition. In some situations you might need a credit and money partner. This could be one person or a couple of different folks. People are always asking me “What is a fair split on these deals?” The fact is, there is no set answer for everyone. It really boils down to what each investor is looking for as far as profit, risk and what they consider is a fair return for their money.
Leveraging Other People’s Time and Abilities
In addition to leveraging other peoples’ money and credit, it can pay to leverage other peoples’ time and abilities.
Leveraging time and abilities might be using a contractor to rehab a deal rather than you swinging a hammer. Sure, you might be able to save a few bucks, but it will likely take longer and you may not do as quality a job as a contractor. It could be utilizing the services of a title company in order to make sure all the closing docs are done correctly and title is insurable. It can be hiring a mentor or an attorney to make sure that the deal is structured correctly. It can be using a person in your deal that has the contacts and wherewithal you need in order to complete a deal more profitably.
Leveraging Your Own Assets
For the rare “deal of a lifetime” you may choose to use your own assets. A lot of investors are unaware that they may have more assets available than they initially think. Here are just a few:
- Heloc- Home equity line of credit. You may have equity in your principle residence or an investment property that you own and may be able to qualify for this type of credit line.
- Cross-Collateralization- Some lenders will attach a lien on a property that you own in lieu of part of a down payment, or to gain you a lower interest rate, or to gain you the extra collateral you need to get the loan.
- Credit Cards- While one should use these with caution, if you run short on a deal and need a couple grand to finish it up, these can be a good short term solution. Some of the big box stores actually offer special rates for investors fixing up properties that can be converted into a longer term loan.
- IRA- This one is huge! We could write several articles about investing in real estate using your IRA. There are limits in how much one can contribute to their IRA but no limits on how much one can earn within the IRA!
There are several regulations that you have to follow but when done properly it gain make you huge gains that are either tax-deferred or in some cases, tax-free. Suffice it to say, you will need the services of someone that knows exactly how to do this. At Bronchick Consulting Group, LLC, this is one of our many areas of expertise.
Well that’s it. Hopefully you will consider leveraging as valuable technique to make your real estate business even more profitable. Here’s to your success!
