You find a motivated seller who has a house he wants to get rid of badly. You can see that owning that house puts you in the position of making a lot of money. You are excited! Then an uncomfortable thought brings you back down to earth: “How can I get this guy to deed this house over to me?” You figure he wants something of value in return for his house. Normally, the easiest way to hand over something of value is to pay money.
Ouch! Where are you going to get the money?
We’ve all heard of Henry Ford. His legacy is one of the largest automobile manufacturers in the world. Did you know that Henry Ford did not invest one cent of his own money to fund his automobile venture? Instead his contribution was his know-how and sweat equity. However, he needed money to get things going – 100 years ago, machinery and parts still cost money. So he simply combined his know-how and work with money provided by people who didn’t want to work as hard as he did but still wanted money. He needed money, so he used other people’s money – OPM. Everybody came out a winner.
Let us look at a very important two-part principle of using other people’s money and of leverage:
1.Money always flows to good deals, and it flows even faster to great deals
2.In any part of the country, there are people who possess more money than they need to live, but they still desire more money; in order to generate more money, they can either work hard to get more, or they can put money that they already possess to work for them
As for the second point, what do you think they would rather do, keep working, nose to the grindstone, or would they rather let effortless, residual income flow to them by letting their money do the work?
In your case, you are willing to work. You had better be, because this doesn’t happen without effort on your part. Your effort and someone else’s money creates a nice synergy. They are happy because they get more money without having to do much, and you are happy because you have money to work with.
You need money to make money.
But it doesn’t have to be your own money.
The more of someone else’s money you use, the more leverage you enjoy in your investment. “Super leveraging” means you completely mortgage out of the property so that you have none of your own money in it. It is possible to do this at closing, but often it is done after closing by having the property appraised or by increasing the value through forced equity (rehab, beautifying, repair) and then increasing the mortgage. If you do this a few times, then you have cash of your own for future investments.
If you remember the principle of the hand water pump, you will see what you are doing here. Do get the pump to flow, it works best if you prime it first with a little bit of water. This initiates the flow, and from then one, getting water to come in large quantities is a matter of simple maintenance — keep the pump working. These first few deals you do OPM mean that you will have funds available for more and larger deals in the future. These future deals will be the beginning of your income investing. The capital you available to put down leverages to a greater monthly rental income against expenses. It doesn’t take long to achieve financial independence.
Lou Vukas is the author of 8 top-selling Internet courses on real estate investing. His background as a real estate investor spans over 12 years and includes deals covering a wide range of investing, from rehabbing to lease options to preconstruction investing. All courses and materials come from his own personal experience as an investor. If you would like to learn more about real estate investing, visit www.realestatefortunes.com