Perhaps one of the greatest secrets of the richest people in the world is summed up in those 3 words: Other People’s Money, or OPM for short. If you took a cross-section of the most affluent business people, you’ll find that the majority of them launched their fortunes using OPM.
Lenders have built their entire businesses around OPM which they lend to home buyers or investors at rates five to six percent of what they give in return for using the money. The amount of interest paid is the cost of borrowing money and is called “debt service.” Lenders who used to allow stated income loans, loans where the annual income on an application was not checked, no longer offer them, or they may claim to offer them but decline 99% of the stated loan submissions offered. This is extremely bad for investors who have made their incomes solely from real estate investing, or other self employed endeavors, as detailed documentation is needed for proof of income.
Investment bankers, securities dealers and fund managers, essentially, get paid commissions on sales and for betting other people’s money. They put together people that have money with those that need money, and those people that can’t bear risk with those that can.
There are also some tips to using OPM when buying real estate (think Las Vegas investment property). When using other people’s money, invest only with a business perspective, do not let the others or “the crowd” influence decisions which potentially require large sums of money. Make a point of learning from your mistakes.
Investment clubs, groups who buy investments together, are generally formed as general partnerships, but could also be formed as limited liability companies or limited liability partnerships (in states that allow them), and are a great way to “get your feet wet” with property investment. While an investment club could incorporate, the double tax treatment on corporate distributions makes the corporate structure less desirable than a partnership.
Once you become established, you may find individuals willing to invest their money in one of your projects. These investors are usually willing to take a risk if they know what they can reasonably expect. They also need to know what your vision is, and what you plan to do to make that vision a profitable reality.
Real estate investment companies, known as REITs or Real Estate Investment Trusts, are corporations that invest in real estate. The purpose of their existence is to acquire and profit from real estate investments. Real growth is the proper way. So far, real growth is the main reason the debt burden dropped, and we need to keep it that way (using mainly Las Vegas rental properties).
Investment property also requires less risk than other types of investment. If the stock market plummets tomorrow, you’ve got nothing to show for it, but property maintains some value. Investors can expect two types of return when investing in property; income and/or growth. If the aim is growth or capital gains, investors commonly take a more long term view rather than expecting more immediate access to capital. Cash flows coming in every month from rentals is an example of income return.
