The Cost of Capital: What does it cost to use OPM (Other People’s Money) to fund real estate investments.

As someone with 7 years of experience in the real estate industry as a private money broker, consultant, adviser and now developer of the REINDEER platform and organization I feel people need to have a better baseline understanding of how capital works. How does OPM work?

The cost of capital for real estate investors using OPM (Other People’s Money) varies based on several factors, including the type of property, the purpose (flipping or holding for rental), and the sources of financing. Here’s a summary:

1. Flipping Properties

• Hard Money Loans:
  • Interest Rates: Typically between 10% to 15%.
  • Loan Points: Usually 2% to 4% of the loan amount.
  • Term: Short-term, usually 6 to 12 months.
  • Pros: Quick approval, less stringent credit requirements.
  • Cons: High cost, quick repayment required.
• Private Money Loans:
  • Interest Rates: Generally range from 6% to 12%.
  • Loan Points: Often 1% to 3%.
  • Term: Flexible, often 6 months to 2 years.
  • Pros: More flexible terms, negotiation potential.
  • Cons: Higher rates compared to traditional financing, relationship-based.

2. Holding Properties for Rentals

• Traditional Mortgages:
  • Interest Rates: Approximately 4% to 7% for investment properties.
  • Down Payment: Typically 20% to 25%.
  • Term: Long-term, usually 15 to 30 years.
  • Pros: Lower interest rates, longer terms, fixed monthly payments.
  • Cons: Strict credit and income requirements, longer approval process.
• Commercial Loans:
  • Interest Rates: Around 5% to 8%.
  • Down Payment: Often 20% to 35%.
  • Term: Generally 5 to 20 years.
  • Pros: Suitable for larger properties, can cover mixed-use properties.
  • Cons: Higher rates than residential mortgages, shorter terms.
• Portfolio Loans:
  • Interest Rates: Typically 5% to 9%.
  • Down Payment: Usually 20% to 25%.
  • Term: Often 3 to 10 years with a balloon payment.
  • Pros: Can finance multiple properties, flexible terms.
  • Cons: Higher rates, balloon payment risk.

Additional Considerations

• Equity Partnerships:
  • Involves sharing profits with partners in exchange for capital.
  • No fixed interest but profit sharing can be substantial.
• Crowdfunding:
  • Platforms connect investors with opportunities.
  • Costs include platform fees, typically 2% to 3% of the raised capital, and investor returns.
• Home Equity Loans/HELOCs:
  • Interest Rates: Typically 4% to 6%.
  • Used by leveraging existing property equity.
  • Pros: Lower interest rates, flexible use of funds.
  • Cons: Risk of losing current property if unable to repay.

Real estate investors should carefully consider the cost of capital, terms, and potential returns before choosing the financing method that best suits their investment strategy.

If you would like to discuss with me please contact me at info@privatemoneyauthority.com or find me on Facebook.

Nate Marshall

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