other people's money

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REtipster does not provide tax, investment, or financial advice. Always seek the help of a licensed financial professional before taking action.

If you have a shortage of working capital and you want to scale your real estate investing business quickly, using other people’s money (OPM) in your real estate business is one of the most powerful things you can do.

Even though it can be expensive in terms of interest rates and fees, if you understand the numbers, you’ll realize fewer things have more impact on your ability to scale.

In my real estate investing business, I exclusively use OPM to buy inventory regardless of how much or little it costs to acquire a property. I routinely pay private money lenders between 25% to 50% of my profit on every deal I do!

On the surface, you might read this and think,

“Jaren, are you crazy?! Why would you EVER pay that much to use someone else’s money? Since you’re already making money in land, shouldn’t you just reinvest your own capital?”

I use other people’s money for two primary reasons: leverage and cash-on-cash return. Let me unpack that a bit.

How Using Other People’s Money Gives You Leverage

Investopedia.com defines leverage in real estate as:

“…the use of various financial instruments or borrowed capital—in other words, debt—to increase the potential return of an investment. It is commonly used on both Wall Street and Main Street when talking about the real estate market.

Leverage is a technique used by both people and companies to expand the potential for returns, while equally expanding the downside of any risks involved if things don’t work out.”

Simply put, when you use any form of OPM, whether it’s private money, hard money, conventional financing, etc., it allows you to maximize your potential for making a profit without relying on your own limited resources.

Let’s say you have $100,000 in cash to invest in real estate. There are multiple ways you can use this capital:

  1. Buying one property outright (such as a small duplex for, say, $75,000 to $100,000) using the bulk—if not all—of your resources.
  2. Spread the money across five different properties that cost $100,000 each (assuming a 20% down payment for each loan).
  3. Spend it on marketing to generate as many leads as possible.

If you went with option 3 above, you’d still have to borrow money to purchase these properties (assuming you’re not assigning or facilitating a double close), but out of these three scenarios, which one do you think will end up making you the most amount of money?

Let’s analyze each to find out!

1. Outright Purchase

If you purchased one property outright, you’re probably going to gross $1,500 to $2,400 per month in rent at best (depending on what market you’re in). If we factor in the 50% rule, that means you would net roughly $750 to $1,200 per month.

This would allow us to completely avoid any debt, but there is no scalability with this approach. Sure, you will own the property outright, but you just spent up to $100,000, and you’re only making anywhere from $750 to $1,200 per month in return.

2. Down Payments on Loans

Let’s look at the second scenario. If you used that $100,000 as down payments for loans on five different duplexes, at the same monthly income of $750 to $1,200 per property (after factoring in the 50% rule), you’re now making between $7,500 to $12,000 per month in gross revenue.

Of course, you’d now have a mortgage on each property. However, even in the worst-case scenario, if you’re only netting between $100 to $200 per door after expenses, you’d still be making $1,000 to $2,000 per month (5 duplexes is a total of 10 units, multiplied by $100 to $200 per door). This is already higher than what you would get owning a single duplex outright.

Not to mention, you’d also control a lot more real estate and accrue a lot more equity since you now own five properties instead of one.

3. Marketing for Deals

Now, let’s assume it will require $5,000 in marketing costs to find one great deal on a duplex. Let’s also suppose that you’ll use a private money lender to purchase each duplex. In other words, your money partner will put up 100% of the cash to purchase each property, and they will split the monthly profits with you on a 50/50 basis.

Based on those assumptions, if you spend all of your original $100,000 on marketing, this will yield 20 duplexes, equivalent to 40 units. Conservatively, if each unit made $100 to $200 of profit per month, these units would be generating $4,000 to $8,000 per month. Even after factoring in a 50% split with the investor, you’d still have $2,000 to $4,000. And these figures haven’t yet accounted for any appreciation or equity you’d gain over time.

One big caveat: I’m not sure if $5,000 in marketing could yield a duplex in every market. This number probably fluctuates up or down depending on the competition from other investors in the same market.

What I do know is that in my land business, I see about one deal per every 2,000 letters of direct mail I send out (which roughly costs $1,500 per campaign).

If I spend the bulk of my investment capital on generating leads, and then I can bring in private money investors to actually purchase the property, and substantially increase the number of deals I can do.

Even if I have to spend 50% of my profit on marketing, the compound effect of doing so much more volume, in the end, makes me the most amount of money.

Understanding the Impact of the Cash-On-Cash Return

Another metric that further solidifies the power of using OPM is something called the cash-on-cash return.

Simply put, cash-on-cash return represents the profit gained from the actual cash invested into some kind of investment strategy. In other words, it reveals how hard your cash is working for you. Typically, it’s used primarily as a way to assess the returns on a buy-and-hold property, but I believe the principle applies to any type of real estate.

Let’s say you’re a land investor, and your goal is to keep 10 properties moving through your inventory cycle each month. Based on the figures above, it would roughly take 20,000 units of mail per month to consistently bring 10 deals into your pipeline. Based on quotes from LetterPrinting.net, this would cost about $13,500.

If you earn an average of $8,000 per property, you’d be grossing $80,000 per month.

At 10 properties per month, let’s assume the average cost to acquire a property is $10,000.

This would mean you’ll have to spend $100,000 PER MONTH to simply buy inventory, let alone $13,500 for marketing.

How many of you reading this right now have $100,000 per month ready to deploy into your real estate business?

What’s more, based on my land business, it actually takes an average of 4 months to sell a property. This means to sustain operations for the duration of this average sales cycle, you’d need $100,000 in acquisition costs and $13,500 for marketing, multiplied by 4 months (which comes out to $454,000)!

Using OPM at a 50/50 Split

Now consider what it would look like to simply use our money only for marketing to find deals while using OPM to acquire all of the inventory. Let’s assume you’re automatically losing 50% of our profit (which is insanely expensive!) to utilize OPM.

At a 50/50 split, you’d bring in $40,000 per month instead of $80,000. However, you’d be spending A LOT less!

When it comes to how much profit you’re making compared to how much money you invest, even at 50% of the profit, you’ll be making substantially more!

To prove my point, let’s compare the ROI of using OPM vs. our own capital:

Scenario 1: Funding Your Own Deals

Now, suppose you can actually afford $100,000 per month to fund your own deals PLUS $13,500 per month to spend on your marketing efforts (that would be $454,000 over the course of the 4-month sales cycle I explained earlier).

The ROI calculation would look something like this:


  • $54,000 in direct mail costs (assuming $13,500 of direct mail per month).
  • $400,000 in initial working capital for purchasing inventory (assuming $100,000 per month for 4-months).
  • $720,000 in gross revenue (assuming an $80,000 profit per month, this would be $320,000 of profit plus the $400,000 of initial capital).

Scenario 2: Using OPM to Fund Deals

Now, if you spent your own money only on marketing costs to find deals, and instead, you use a private money partner to fund 100% of the acquisition costs, while agreeing to split 50% of the profits with them, the ROI calculation would look more like this at the end of 4.5 months:


  • $54,000 in direct mail costs (assuming $13,500 of direct mail per month).
  • $160,000 in gross revenue ($40,000 per month, after deducting 50% of profit for money partner)

As you can clearly see, even if you only make 50% of your profit, your return on investment is substantially higher when you use other people’s money.

How to Begin Using OPM in Your Real Estate Business

When it comes to using OPM, there are several options to consider. Here are the most common.

Conventional Financing

Financing from a bank or traditional lender is one of the cheapest and most flexible forms of financing. Whether it’s a mortgage, a home equity line of credit, a cash-out refinance loan, a business loan, or a business or personal line of credit, traditional financing is some of the cheapest money in the world.

RELATED: Need Money? You Need to Know About This…

The problem is that traditional lenders can be picky. They typically require several years of bookkeeping on record, a high credit score, a minimal debt-to-income ratio, and so on before they’ll agree to lend to you.

With how strict conventional financing can be, it may be difficult to secure adequate financing in the allotted time an investor has to secure funding. If you can meet the requirements, though, traditional financing is hands down the best out there.

In the vacant land niche, some banks specialize in financing rural land, but they only lend on properties intended to be held for years. If they discover that your objective is to turn around and sell the property as fast as possible, most likely, they won’t lend to you.

Hard Money

Hard money is so-called because these lenders only lend on hard assets, like real estate, which can be taken as collateral to secure the loan. Hard money lenders are more flexible when it comes to their lending requirements, but they typically cost more than traditional financing. Still, they’re likely much cheaper than a 50/50 split!

If you can find the right lender, hard money can be a great option. However, my experience with hard money lenders has been lackluster at best. They tend to cherry-pick which deals are most profitable, limiting my confidence in them as a continuous, reliable source of financing.

Seller Financing

Seller or owner financing isn’t always a reliable source of working capital, but it can be incredible when it’s available.

For example, if you’re trying to acquire a buy-and-hold property and use seller financing, you might be able to get into the deal with very little money out of pocket and underwriting. Meanwhile, if your goal is to flip a property and the seller agrees to finance the deal until the flip is complete, this could substantially help your cash flow and ROI.

The main drawback to seller financing is that it all depends on the seller, and it can only be attained on a property-by-property basis. This means it’s not as reliable as other forms of OPM.

Joint Ventures

A joint venture (JV for short) is when two companies pool their resources to accomplish a common objective. This can be structured in many different ways, like a specific JV entity or agreement between the two companies.

Joint ventures are designed to be attached to a single property or a single project. They are not full-fledged partnerships; they’re two entirely separate companies coming together for a common goal and for that goal only.

They can be an excellent way for investors to work with others on a specific deal while still maintaining a lot of control and flexibility in their individual business.

Equity Partners

Equity partners are partial owners of your company. In the context of using OPM, an equity partner can supply the working capital needed to do business at scale in exchange for a certain amount of ownership. Under the right circumstances, an equity partner can be a fantastic way to grow and scale a business.

The major drawback is that equity partners can potentially be a major bottleneck in your ability to operate the business. Unless they relinquish operational control, you won’t be able to operate the business freely if they disagree with a decision you want to make. They may require signing off on closing documents or other aspects of the day-to-day operations, which creates an enormous time suck.


Syndication is a type of partnership that heavily limits the operational control of the private money investors. It divides a partnership into two: the limited partners and the general partner. The general partner actively implements the investment strategy while the limited partners only invest capital.

This type has a few restrictions regarding how wealthy and educated a private money investor has to be, but as long as the requirements are met, syndication can be a great source of financing.

RELATED: What is an Accredited Investor?

Syndication can be expensive to establish, but it can be a fantastic structure for raising large amounts of capital from several different people.

Private Money Lenders

One additional way to structure OPM is to bring on private money lenders in the form of a private mortgage and promissory note. These individuals have funds they’re looking to invest, but they’re normally not overly sophisticated or difficult to work with. Most of the time, they want to remain as passive as possible and have no interest in getting involved with the day-to-day operations.

This is probably the most flexible form of OPM because the terms are only limited to what is agreed to by both parties. It’s also my preferred method of using OPM.

One drawback is that if the borrower (i.e., you as the active investor) defaults on the loan, the lender may have to go through a timely and expensive foreclosure process.

Assignments and Double Closings

One last section worth mentioning is doing business through assignments and double closings. Though this doesn’t use other people’s money in the strictest sense, it can provide a similar outcome.

Assignments and double closings are a funding strategy primarily used in a transactional business like wholesaling houses or flipping vacant land. Here are a couple of videos that thoroughly explain what these concepts are:

One disadvantage is that an assignment and a double closing can be logistically tricky to facilitate. For example, if you don’t want the original owner to know that you’re trying to sell the property before you’ve even bought it, BUT you also have to actively market the property for sale, you’re at risk of the seller finding out and calling off the deal.

If you’re willing to put up with these challenges, though, it can be a lucrative way to fund your business without using your own money.

RELATED: How to Invest in Real Estate With Little Money (Yes, It Is Possible)

How to Structure a Real Estate Deal With a Private Money Lender

In the land business, I’ve seen private money lenders structure deals in two ways. Let’s take a look at each.

1. As a JV or Co-Owner of the Property

The first path is where a lender comes in and either JVs or becomes the actual owner of the property, meaning they partially (or fully, in some cases) take title.

The rationale behind this approach is that, since 100% of the funding is coming from the money partner and they are bearing all the financial risk, there’s a case to be made that they should be the sole owner of the property.

When the property eventually sells, the money partner will then payout 50% of the profit to the active investor through a 1099.

When I’m working as the active investor (putting in 100% of the effort to find the deal, handle all the due diligence and get it sold), I personally don’t like this structure at all. It gives the private money lender an over-abundance of control over the property and typically requires them to sign off on documents when I close a property.

I’m not an attorney, but if you ask me… I think this is crazy! There’s also a valid argument that this arrangement is forcing the investor to act as a real estate agent without a license—because they’re literally marketing and selling a property on behalf of an owner in exchange for compensation. If you’re not licensed and you have a potential investor who wants this setup, I would seek legal advice as soon as possible.

2. Through a Private Mortgage

This is my preferred way to structure a real estate deal that utilizes OPM. With this approach, the active investor can maintain title and control of the property, but the private money lender is a first position lien holder, with a mortgage and promissory note recorded in the public records.

While I’m not an accountant, I have been told this is more advantageous from a tax perspective for the private money lender because interest payments are taxed less severely, because they’re a different kind of income than capital gains (I would encourage you to seek the advice of your accountant to confirm whether or not this is true).

As I’ve mentioned previously, the major drawback is that from the lender’s perspective, they are in a position of risk. If the investor ever dies, disappears, or defaults on the loan, the private money lender will have to go through a foreclosure process to gain control of the property.

However, there are some things you can do to remedy this situation, as we’ll discuss below.

How I Structure Private Money Loans in My Real Estate Business

In my land investing business, when I use OPM to acquire each new property, I set up mortgages with a twelve-month term. This gives me a year to sell the property, and if I fail to do so, the lender can call the note due for a minimum of 12% simple interest. In the meantime, I don’t make any payments to the lender until the property has sold.

Note that the lender can stay in the deal if they want to. At twelve months, they have the option to call the note due, but they can also renew the note for another 12 months.

When a property sells, I pay the lender interest equivalent to a certain portion of the profit, depending on how long it takes to sell. Even though 50/50 splits can still work because of the power of OPM, this is still insanely expensive. If you look at practically any other types of real estate investing, no investor would ever use private money if they were going to lose 50% of the profit!

So, in my land business, I pay out investors on a sliding scale. For example, if I sell the property within three months or less, I’ll pay the private money lender interest equivalent to 25% of the profit. If it’s between three and six months (which is when most of my properties sell), I’ll pay out interest equivalent to 35% of the profit.

Then, if the property sells between six to twelve months, I’ll pay out interest equivalent to 50% of the profit.

Time to Sell Lender’s Payout
0 – 3 Months 25% of Profit
3 – 6 Months 35% of Profit
6 – 12 Months 50% of Profit

All the private money lender has to do is agree to our terms and then wire in funds the day of closing.

How I Overcome Objections Regarding Foreclosure

Foreclosure can be an extremely cumbersome and expensive process.

This is doubly so for private money lenders, who typically want to remain as passive as possible; the risk of having to go through foreclosure may be too much. To overcome this objection, I make the promissory note say that if the borrower defaults on the loan or is unresponsive for a certain number of days or dies, the lender can get the deed in lieu of foreclosure.

Depending on the state you’re operating in, though, this may not be enforceable.

If there is a lender that you really want to do business with, but this foreclosure issue is preventing them from working with you, try placing the property in a Real Estate Privacy Trust and then list the lender as the trustee. You can then adjust your lending agreement to trigger the lender (as trustee) to assume control of the property in case of default, death, or disappearance.

This will give the lender control over the property if things go south. Just as long as you clearly write everything properly in the contract, you (as the active investor) should maintain full control outside of those circumstances.

Keep in mind that there are extra costs to establishing and placing a property within a trust. From what I can gather, it’s between $300 to $600 extra in closing costs when you place a property in a trust. There is also the initial cost to establish the trust, which can range between $800 to $1,000, depending on what attorney or legal service you enlist to assist you.


In the end, using OPM was one the best things I’ve ever done in my land business. It’s given me the ability to scale a lot faster than I ever could on my own.

I hope today’s article revealed how powerful using OPM can be, for you, and your business pursuits.

Happy investing!

About the author

Jaren Barnes is a real estate educator and coach. He runs a full-scale land flipping business, house hacks and has an interest in vacation rentals and long-term buy-and-hold. Jaren got his start in real estate door-knocking pre-forecloses, briefly worked at BiggerPockets.com, was responsible for selling 25-30 properties per month at Simple Wholesaling, and has interviewed hundreds of real estate, business and financial experts across multiple podcasts.

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