Is “OPM” real or a myth?

Question

Along my journey to understand how to acquire my first property, I have encountered people that swear it’s possible to use other people’s money (for down payment, closing cost, rehabs etc) but on the other hand I have investors of 20,30,40+ years who think I am absolutely nuts for even thinking it’s real & make it very clear that I am an idiot for ever believing such a thing and will 100% need to come up with my own funds. So I am confused. Is there anyone who can prove or disprove this with their own experience? I have no idea who to follow guidance from and don’t want to get burned.

Andrew Syrios · Answer

It certainly is possible (private loans, partnerships, syndications, creative financing, etc). But usually you need to build a reputation and have some deals under your belt before someone (other than family) will trust you with their money. This is why for 90% plus of aspiring investors I recommend starting with house hacking.

JD Martin · Answer

I would ask this: why do you want to do any deals with 100% other people's money? Is it because you don't have any money? If you don't have any money, how will you fund the inevitable issues that come up in real estate investments?

I believe the first step to becoming an investor is having something to invest. If that means a second job or eating noodles every night, so be it.

Randall Alan · Answer

@Jacqueline Lee

Hi Jacqueline,

It’s absolutely real.. but I would say there are caveats.  As an absolute beginner… it’s a tall order!  What I mean is that your deal has to be awesome for someone to be willing to front ALL the money - and for that service you will pay ”a pretty penny” as the phrase goes.

Disclaimer - I just know about it - I’m not involved in it - but can at least advise…

Most of what you are seeking are called hard money lenders.  They will charge you points up front - so say you wanted to borrow. $100,000 - they might say, ok 2 points and 12% interest on your money.   This translates to you will only receive $98,000 ($100,000 minus 2% <points>.  then you will pay them 12% for the time you borrow the money - but will owe the $100,000 + 12%.Caveats - they usually want you to have some money in the deal too - but 100% financing isn’t out of the question.

The more other assets you have, or the more you have done other deals - the easier it is to do the next deal.

Think about a 16 year old wanting to borrow lots of money - all the questions you would have for a youngster (read - newbie)  a HML Is going to have about you!  Do you know what you are doing being you’ve never done a flip before?   So if you walk in and say “I have nothing, and I know nothing” it probably isn’t going to go great.  If you walk in and say - this is my 3rd deal, here are the other two flips  I made 6 figures on, I own my own house and have some money to throw in the deal as well… it’s a lot easier.

Then there is the deal itself.  It has to make sense.  Which is code for- has a great profit margin after expected repairs.  The people lending you the money will have done numerous deals.  They know what they are looking for.  So a $20,000 profit probably isn’t going to be very interesting to them compared to 6 figures.  You will lose 1/2 that $20,000 just in closing costs. And lots of things can go sideways on a flip - especially for beginners!

Beyond hard money lenders - you could also turn to family members who might know / believe in you if they have resources to offer.

We know nothing of your skill set, resources, or abilities.  All those things factor into this arena though.

But fur sure, hard money lending is a thing.  You can google “your state” and “Hard money lenders” and read up on them,  many will put their requirements on their websites.

All the best!

Randy

John Morgan · Answer

I’ve used OPM to buy n hold my 27 SFR. My wife won’t let me use our own $ to buy houses so I I’m forced to use OPM to scale up. Cash out refis paid for 14 houses with zero out of pocket. I’ve done five 401k loans which I use the rental cash flow to pay back. And I’ve done several 0% interest for a year credit cards. And some lines of credit to buy houses or pay for rehabs. Once I pay back these loans. I repeat.

Theresa Harris · Answer

I'd avoid hard money loans as the interest rates are super high. I also agree with JD Martin-if you are using other people's money for basic things like a down payment, is it because you don't want to risk your own money (then why is it okay to risk other people's money) or because you don't have any money (if so why?).  You have to have some skin in the game or else why would anyone risk their money on you?

Don Konipol · Answer

The question is not does OPM “Exist”

The question(s) is (are)

1. Can I by way of my experience, knowledge, and capital attract OPM

2. Is the deal I’m considering profitable enough to sustain the cost of OPM

3. Do I want to undertake the additional risks associated with “OPM”

4. Are the benefits worth the risk.

Additionally, everyone will define exactly what OPM is differently.  I am using OPM as meaning the use of funds other than my own to replace funds I would otherwise need to complete an acquisition using standard financing.  So, if a “typical” transaction would require 20% down payment to go along with an 80% institutional loan, then if I brought in a couple of investors who funded 10% each and I as “sponsor” received a 33% ownership interest as “promote”, I would have used OPM for that 20% down payment. BTW, a common misconception is that hard money loans are used when borrowers are “short” down payment money.  This is incorrect.  Hard money loans are loans based on (mostly) the value of the asset, eliminating or reducing the other criteria used for most mortgage loans of borrower credit, financial condition, and sometimes even cash flow of subject property.  As such they are usually made a LOWER loan to value than institutional loans.  So while an institutional lender will usually top out at 75 - 80% of value, hard money loans will top out at 60-70%. Sometimes people confuse hard money with PRIVATE LOANS, which refer to individuals who lend their savings as investments. And yes, some “dumb” (inexperienced, naive, misinformed) may do high risk things like lend with no down payment, or lend earnest money.  But each transaction is a roll of the dice, and as any gambler knows if you continually “double down” it’s just a matter of time before you lose your “stake”.

Becca F. · Answer

I agree with the other comments. It's going to challenging as a first time investor trying to convince someone to lend you money with no proven track record.

I have small portfolio so I thought I would try the OPM strategy to try to scale. I was going to attempt my first flip project out of state using a Hard Money Loan. The interest rate was 12% and I still had to come to the table with some money and renovation cost was most likely going to go over (confirmed by talking with multiple contractors) and ARV wasn't high enough. I started adding up the interest payments if this property didn't sell and trying to refinance it to a conventional loan to rent it out (my exit strategy if the flip didn't sell). Pass on this project.

Then tried to do a BRRRR by asking private lenders (investor friend and my sister). Got out of that deal - too many red flags. That would have ruined my relationship with my sister if things went bad with this property. I wound up using my own money on a different property.

If you don't have enough money, work on increasing income and house hack using a 3.5% FHA loan or 5 to 10% conventional loan.

Chris Seveney · Answer

@Jacqueline Lee

It’s real but the scales are not equal and heavily weighted to those with experience and their own money

So if you have no experience and no money - your odds are low as why would someone lend you money?

If you have done 10 deals and have $100k to put down - then it can be done a lot easier

The way to get opm is typically either experience or money - I tell people to save the money and then you could get the experience

Scott Mac · Answer

As any gambler knows:

https://www.youtube.com/watch?v=7hx4gdlfamo

Adam Bartomeo · Answer

I have used OPM many, many times. The best deals I or they ever made were structured this way. If they are bringing the cheddar that you better be bringing something just as valuable!

Is “OPM” real or a myth?

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