Tag Archive for: hard money lenders

70 Percent ARV: Why Can’t I Get More for My Real Estate Deal?

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The real reason your fix and flip lender won’t give you more than 70% ARV…

One thing new investors ask all the time:

Why do lenders only lend 70 or 75%?

Let’s go over the numbers and see how lenders come up with that 70% number.

What Is ARV and the 70% Rule?

The number we’re talking about is what percentage of the after-repair value (ARV) a lender will give you.

The ARV is what you can sell a property for after flipping, or what it can be appraised for on a refinance for a BRRRR rental.

Here’s an example of what a 70% ARV might look like:

You buy a property. The market shows it will sell for $200k after it’s fixed up. If your lender offers 70% of the ARV, that’s the maximum amount your loan could be. In this case, 70% of $200k is $140k. So you can get up to $140,000 as a loan when you buy this property.

So that’s $60k worth of value that’s not being covered. This is where investors ask the question… There’s still a lot of money here. Why can’t I borrow against that extra $60,000?

Let’s dive into why lenders stop at 70%.

Why Do Lenders Stop at 70% ARV?

If lenders stop at 70% of the ARV, what happens to the remaining 30%?

Profit

First, is profit for you. Why do you invest in real estate? Because you want to make a profit. And if you don’t factor in profit at the beginning of your deal, there’s not going to be any leftover for you.

So as lenders, we build in a 10-15% profit margin for you. Let’s say on average, it’s 12.5%. That amount comes from the 30% of the ARV not covered by your loan. 

In our example $200k property from earlier, 12.5% is $25,000, which will be profit for you at the end of the project.

Realtor

There are a few other people involved in this process, especially on the selling side.

When you bring in a realtor, you can expect to say anywhere between 4.8% and 6%. To keep it easy, we usually estimate 5%.

So of your ARV, we’ve already taken up 17.5% between your profit and your realtor.

Closing Costs, Cost of Funds, and More with a 70% ARV

Closing costs vary, but it’s safe to assume they will cost 1.5%.

With all the costs so far, we could be looking at anywhere between 17% and 22%, but an average of 19% total.

After you’ve purchased the property and started fixing it up, there will be more costs. Two major areas that should be factored into your budget are interest on your loan and a general overage budget.

Between these extra costs, we’re sitting at an average of 29%…

Which is exactly why lenders leave 30% of the ARV off of the loan they give you.

Making Sense of a 70% ARV

With real estate investing, the money’s in the money. Understanding and feeling comfortable with the numbers is the fastest way to start getting into great deals.

You don’t want to get into a deal that won’t be profitable for you. If you won’t get at least 10-15% profit, why do it? Your lender should leave space for your profit and other costs that come up.

Have questions or a deal where you need help with the numbers? Contact us at Info@HardMoneyMike.com, and we’d love to see how we can help.

You can also get more resources about real estate investing on our YouTube channel.

Happy Investing.

Private Money vs Hard Money: Is There a Difference?

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There’s no technical difference between private money vs hard money… Or is there?

As a real estate investor, one of your main goals is to get the best leverage possible. You want lower down payments, interest rates, and fees.

But who’s going to give you that best leverage? Private money lenders, or hard money lenders?

In fact, is there a difference at all between these two lender types? Let’s take a look at private money vs hard money and see who you should go to for the best prices.

What’s the Difference Between Hard Money & Private Money?

Firstly, what’s the difference?

Here’s the thing: private money loans and hard money loans are usually used interchangeably. There’s no clear-cut definition between them.

Both types of lenders ultimately do the same thing – they lend money based on an asset for real estate investing.

Okay, But What’s the REAL Difference?

Although private money and hard money are the same concept, each word has different connotations in the real estate investment community.

We’ve found that people typically associate local lenders with hard money. And they consider capital corporations – the capital funds off Wall Street – private money lenders.

Again, we’re doing the same thing. We’re lending money based on an asset for real estate.

So why are we making such a big deal about the difference? Although they’re the “same” thing, the requirements and costs of each type of money can be vastly different.

Let’s look at what we’ve found about the experience of a private money lender vs a hard money lender.

The Hard Money Experience

People tend to have a poor perception of hard money. They assume hard money = loan sharking. That hard money lenders will get you into a bad deal just for the sake of profiting off you.

The reality is quite the opposite.

Local hard money lenders make money when you make money. They want you to be a successful investor.

Therefore, hard money is flexible in the type of deals they’ll look at and the type of help they offer. They’ll do gap funding and second positions; they may offer bridge loans for saving flips that have gone bad. They’re not strict on credit score requirements, and they often don’t even require an appraisal.

The Private Money Experience

Typically, Wall Street private money lenders are “box” lenders. That means anything that doesn’t fit in their box, they will not do.

Private money also tends to be a bit pricier. We’ll share a story to describe this.

Mike did a group meeting for a real estate investor in Boulder, CO. He went over the hard money loans that we could do. At the end, someone brought up the common question: “What’s the difference between hard money and private money?”

The organizer of the event stepped in. He said, “I’ll tell you what the difference is. I used a capital company. I used someone from Wall Street.” And he shared their terms.

And guess what?

He was putting 5% more down than a hard money lender would require. He was paying a 1% higher interest rate and over $1,200 more in fees. …All because he wanted to be able to say he was working with a capital fund private lender.

We see clients who share a similar story. People lose money on projects by not looking at the exact costs and opting for the bigger name instead.

Which Is Better – Private Money or Hard Money?

So, to determine what’s best for you, you need to look at all the numbers.

  • How long will each loan take? How much will a slow close cost you?
  • What do you need to put for a down payment?
  • Do I meet the credit score requirements?
  • What are the rates?
  • What are the fees/points?

Invest by the numbers, not by the names.

To make this part of the process easier for you, we have a free loan optimizer download for you. For your next project, do this:

  • Go to three different lenders – a mix of private and hard money. 
  • Get all the numbers from them for what they’ll offer on your deal.
  • Plug those numbers into the calculator.
  • Compare the final costs the calculator gives you to determine the cheapest loan.

Why do you have to be so rigorous with numbers? When it comes to private money vs hard money, the cheaper option up front often isn’t the cheaper option overall. The lender with lower interest rates might slip in more junk fees. The one who charges zero points could have upwards of 12% interest rates. The only way to find the best loan for your deal is to use a tool and do the calculations.

I Might Want a Loan

Need a real estate loan? We want you to get the best one possible. Leverage makes your real estate world go round, and the cheaper you can get it, the more successful your business.

Reach out to us with a deal at Info@HardMoneyMike.com.

For more real estate investing resources, check out the videos on our YouTube channel.

How Much Hard Money Can I Get? A Guide to Borrowing

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How much hard money can you get from lenders? Here’s a brief guide.

Which hard money lenders lend the most?

That question may mean two things to two different investors.

Some people want to know: How much hard money can I get? Five million dollars? Ten million? For other people, the question is: What is the max loan-to-value I could borrow? 

Let’s go through the 3 types of private money lenders, who lends the highest dollar amounts, and who offers the best LTVs.

3 Types of Hard Money Lenders

There are 3 types of hard money lenders:

  • Local: Hard money lenders near your state, city, or region.
  • National: Newer in the hard money scene. They’re backed by Wall Street and lend across the US.
  • Real OPM: A real person you know who has cash they can lend to you for a return.

How Much Does a Hard Money Lender Lend?

First, let’s look at who lends the most as far as dollar amounts.

How much hard money can you get? This comes down to the fund availability and lending capacity of the lender.

National Lenders Loan Amounts

Which lender has the capacity to lend big dollar amounts? That will almost always be national lenders.

These lenders are backed by hedge funds. This means they have a seemingly endless supply of money for loans. (The catch is they only supply loans that fit inside their box, which tends to be fairly limiting).

Larger loans might be $1-10 million and up, even as high as $150 or $250 million. National, hedge-fund-backed lenders will be your only option if you need these amounts.

Local Lenders Loan Amounts

Regional lenders’ loans come in many sizes, but the majority only lend under $1 million. The affordability sweet spot for these lenders, however, is between $100,000 and $300,000, depending on your area.

Real OPM Lenders Loan Amounts

Remember that OPM involves a real person. This person has money stowed away in an IRA and other investment accounts. They want to lend to get a better return, but their pool of funds is definite.

Most OPM loans range between $25,000 to $50,000 – perfect for gap funding, but not always for a complete project. There are some individuals with $500k to $1M to lend, but ultimately, that cash runs out fast in investing.

An OPM lender will be the first one to run out of funds (and the one with the smallest dollar amounts to lend).

What Is the Max LTV You Can Get for Hard Money?

When you think of lender loan amounts, you might think of the gross dollar amount. But you should also think of the LTV.

LTVs are very dependent on market conditions. Now, at the end of 2022, all lenders have tightened up LTVs.

  • National hard money lenders have tightened the most on max LTVs. Hedge-backed hard money lenders will offer somewhere between 80% and 90% of the value of the project’s cost. This number will be dependent on your credit score, experience, and other criteria.
  • Local hard money lenders offer the next best LTVs. At Hard Money Mike, for example, we understand our local markets and are still lending at high loan-to-values. It’s dependent on the loan-to-ARV number, but most local lenders are offering LTVs from 80% to 100%.
  • OPM lenders tend to give the best LTVs. If they can cover the entire cost of the project, they likely will, with minimal requirements. OPM is more trust-based, so it operates more flexibly than actual loan companies.

You’ll certainly need all of these lenders to be successful in real estate. The right lender will be different for each project.

How to Calculate How Much Hard Money I Can Get?

Download our free loan optimizer here. With this tool, you can enter the numbers from 3 different lenders to compare the cost of borrowing from each one.

We want you to find the right lender to make more on your project. There are some people who would like to charge you as much as possible to make maximum profit on each loan. We would rather see you have a successful deal and a long, happy real estate investing career.

Happy Investing.

Text: "Which hard money lenders check credit?"

Do Hard Money Lenders Check Credit?

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A question for many beginner investors is: “Do hard money lenders check credit?”

The answer? Yes and no.

In the hard money lending world, there’s a big split in lenders’ approach to credit scores.

National Hard Money Lenders and Credit

On one hand, there’s the national lenders, the big hedge funds, the major institutions. For them, it’s all about credit and experience.

You end up being a number to these bigger companies – a data point. So they focus on the numbers that represent your success. The most important of these numbers is your credit score.

The larger the institution, the smaller the box they need you to fit in. So if you’re looking for money and your credit is below 680, you probably won’t fit in the box of national hard money lenders.

Local Hard Money Lenders

On the other hand, there’s smaller, local hard money companies. These local hard money lenders won’t check credit as the basis for the loan.

Most local hard money lenders look at you and your deal. They’ll want to know:

to see whether you have a good chance of making money from the deal.

If you’re investing while your credit score is lower, gear yourself toward these local lenders. There are plenty of these hard money lenders around – hundreds in the Denver market alone!

Read the full article here.

Watch the video here:

Text reads "What Is Hard Money." Mike Bonn stands with cartoon coins surrounding him.

The Beginner’s Guide to Hard Money Loans

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Hard money basics you need to know before real estate investing.

We’ve been in the hard money loan business for 20 years. Half the calls we receive are still beginner real estate investors trying to learn the money side of investing.

If that’s you, you’ve likely applied for, heard of, or thought about using hard money lenders. But maybe you don’t fully understand the private lending world yet. How does a hard money loan work? How much interest do private lenders charge? Do hard money lenders require a minimum credit score? Should you just wait until you qualify for better bank loans?

This guide will help answer:

  • What is hard money?
  • What do hard money lenders look for?
  • How is hard money different than other loans?
  • How do you qualify for hard money?
  • Is hard money better than banks?

Becoming hard money proficient will put you miles ahead as an investor. 

Ready to nail the basics?

What is Hard Money?

Hard money is a short-term loan designed for real estate investors. Hard money lenders focus on lending money on undervalued properties in need of rehab.

Hard money loans are short term – usually around six months or a year – and are designed to help buy properties to fix up.

While “easier” than traditional bank loans, hard money loans are also more expensive due to higher interest rates. Which brings us to the most important quality of hard money loans: they’re fast.

In real estate investing, discounted properties typically require fast-closing deals. Hard money loans can help you take advantage of prices while they’re low, and: 

  • Save on the property cost to begin with
  • Get more from selling or refinancing the property.

These savings more than cover the costs of a hard money loan for most investors.

The speed of hard money makes it valuable for newbie and seasoned investors alike. Hard money loans are made for real estate investors.

How Does A Hard Money Loan Work? 

What do hard money lenders look at? There are two main factors lenders of hard money consider.

Loan-to-Value Ratio

An important number a lender takes into account is the cost of the property. The ratio of the loan they offer and the cost is important for you to know.

Let’s say you have a property with a current appraisal of $200,000. Then you get a loan for $100,000. The loan is half of the value of the home, so your loan-to-value is 50%.

After Repair Value (ARV)

ARV, after repair value, is another important factor hard money lenders consider. The properties targeted by real estate investors are undervalued. They need work to be brought up to the standards of the surrounding community.

So, lenders look at not only the current value of the house, but also the future value of the house, after it’s all fixed up.

Many hard money loans are based on after repair value rather than loan-to-value. Your lender might offer you up to 75% – not of what you’re buying it for, but what you could sell it for by the end. 

What Does ARV Cover?

A key factor to ARV is that lenders will lend not only for the initial purchase, but for the fix-up costs. 

Many lenders will put money aside in escrows to use throughout the project to pay contractors and cover other renovation costs. 

If your loan considers ARV, it’s possible for you, with ZERO money down, to:

  • Buy a property.
  • Fix it up.
  • Either sell it (fix-and-flip) or refinance it (BRRRR).

After selling or refinancing, you use that money to pay the loan back.

Hard money is designed to build value into real estate. Understanding the role of the after repair value will help you immensely in your hard money investments.

How Is Hard Money Different from Other Loans?

Interest rates on hard money are between 2-5% higher than what you’ll find at banks. You can expect origination fees to be about twice as much. Appraisals will be close to the same.

So on paper, the rates and fees are higher, so it feels like you’re spending more. Which you are! But with hard money loans, you’re paying for:

  • Accessibility
  • Convenience
  • Flexibility
  • The opportunity to purchase properties you’d never be able to while relying on bank loans.

While hard money costs more than other loans, the potential value is also way higher. When sellers have discounted real estate, they want it sold fast. Banks can take 25-30 days to close. You can receive hard money in a matter of days.

Every week, we see hard money work to save people money.

When a recent client of ours bought a property, he saved 10% – just because he could close faster than the other five bidders. His savings on that purchase were $30,000: much more than double what he’ll spend on the loan transaction.

How Do You Qualify for a Hard Money Loan?

There are two kinds of hard money lenders. They each have different qualification requirements.

National Hard Money Lenders

National lenders lend in almost every state. They are larger organizations, backed by hedge funds and private equity.

National hard money lenders require:

  • A credit score check, and a good score.
  • Experience – at least five deals in the last three years. 
  • Properties to be in specific larger communities.

So if you’re new to investing, need to improve your credit score, or are looking at more rural properties, you may need to look into local lenders.

Local or Private Hard Money Lenders

A local, or private, lender will specialize in your state or area. Local lenders are much more likely to:

  • Not ask for a credit score.
  • Not require experience.
  • Lend for rural areas.

Local lenders are focused on the deal itself and whether it has good value.

When deciding which lender to use for hard money, always shop around to see what fits your situation now. And be aware that another lender may fit you better in the future.

Are Private Lenders Better Than Banks?

It’s impossible to say whether hard money lenders or banks are “better” for real estate. It all depends on your deal and where you are in your investment career.

When to Use Bank Loans vs Hard Money Loans

Bank loans will have lower rates and may be the better route if you:

  • Have had a successful investment business for over two years.
  • Make a lot of money at a W-2 job.
  • Have 3-4 weeks to close.

Hard money loans will be easier, faster,  and may work better if you:

  • Are newer to real estate investing.
  • Don’t have money up-front to invest.
  • Don’t want to put your own money into a deal.
  • Need to close within a week or two.

As long as a property promises income, hard money more than makes up for its higher rates with the speed and greater potential savings. Starting in hard money paves the way for you to work up to bigger funding opportunities.

Ultimately, your investment career should always have a mix of funding types. Bank loans, hard money, and OPM all have their place to work for you in real estate investing.

Where to Go from Here

Understanding money is key to successful real estate investments. When you put time into understanding money, you get control of it. With control, you can multiply your investment earnings four times over.

It doesn’t stop here. We want to help with your hard money education:

How to Buy: Breaking Down BRRRR

The BRRRR Method

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Ready to build up a rental portfolio and get cash flow on properties with zero money down? The BRRRR Method.

Check out this 8-step guide to BRRRR investments.

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Have you heard of BRRRR? Here’s our 8-step guide to rehab and rent undermarket properties for maximum cash flow in your real estate investment business.

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Buy

Rehab

Rent

Refinance

Repeat

 

Check out these other crucial steps to the BRRRR  of real estate investing:

 

 

Read more on the BRRRR Method on Hard Money Mike here?

Download our free BRRRR roadmap at this link. And for more resources, check out these videos from our YouTube channel.

 

Wholesale properties

3 Must-Know Answers to Finding Undermarket Properties

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A real estate investor’s intro to wholesalers.

At the end of the day, successful real estate investing hinges on one thing: finding good deals on properties.

The #1 way to get those deals is through wholesalers. But how do you find wholesalers? And what should you do next?

What Are Wholesalers?

Wholesalers are companies that research and locate below-market-value properties. They find homeowners – through mailers, texting, or other means of marketing – that are willing to sell undermarket.

Wholesalers keep some of the properties they acquire, but they sell many of them off to real estate investors. That’s where you come in.

You can, and should, make wholesalers a profitable member of your investment team. Let’s talk about:

  • How to find wholesalers
  • How to get on their “A-list”
  • How to verify their numbers

1. Where Do You Find Wholesalers?

There are some really small wholesalers that find one or two properties a month. Others are huge companies that spend hundreds of thousands of dollars per month, finding hundreds of homes every year.

Generally, the only way to find wholesalers is to ask around about who is selling properties in your area. Here are three ways to do this:

  1. Search Google. Simple: look up “I want a house in” and your city name. You’ll get lists of people wanting to buy houses. These are the same people who will be selling them to investors.
  2. Use biggerpockets.com. Your best resource is other real estate investors. Log on and ask who the wholesalers for your area are.
  3. Join local Facebook groups. You can ask other investors who the wholesalers are. Or, you can look and see what people and organizations are trying to buy cheap properties. Those will likely be wholesalers.

Other investors are a good resource for finding wholesalers, but of course, they’re also your competition. Once you find wholesalers, your next step will be to find a way onto their A-list.

2. How Do I Get to the Top of a Wholesaler’s Preferred Buyer List?

Before they send out a property to their whole group, wholesalers will send it to their best buyers first. They will want to get rid of it as quickly and efficiently as possible. If they can sell it without having to coordinate property tours and indecisive buyers, they will. 

So, how do you get on that list?

  1. Know exactly what you want. Don’t show up uncertain. Come with either cash in-hand or a hard money lender. They will want a smooth, no-drama process.
  2. Find lenders they work with. This way, the wholesaler will be confident that the deal will close, close fast, and close with no issues.
  3. Close the deal. If you get under contract with them, follow through with the deal, and do it as fast as possible. Don’t get into a contract unless you know it’s what you want. 

In general, you’ll want to cause the least amount of friction possible. After all, you probably feel the same way: the people who make things easy and enjoyable are the people you’ll want to work with over and over again.

3. How Do I Know If I’m Getting a Good Deal with a Wholesaler?

You and the wholesaler will have different motivations in the deal. They need to make money, so they may be “optimistic” with the numbers they tell you. To protect your interests, you’ll have to be proactive and realistic.

Double check their numbers. This includes:

  • The current condition of the property
  • The cost of repairs to bring it to market
  • How long it will take to get to market

It’s also important that you go in knowing your numbers. It will make verifying their numbers a lot easier, and it makes the process smoother for them (see #2 of this list). 

If you’re not sure how to plan these financials for a deal, have a friend or a contractor help you get an estimate.

The Wholesaler and Investor Relationship

A wholesaler will be a valuable member of your real estate investment team. Do everything you can to stay on their good side, but also be prepared to advocate for yourself in every potential deal.

If you need extra help with evaluating cash flow for a property, download our free loan optimizer at this link, or check out this video series on our YouTube channel.

OPM Gap Funding

What is Gap Funding?

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Fill in the financial blanks of your fix-and-flip! Learn about gap funding for real estate investors and where to find it:

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Gap funding is necessary to take your real estate investing to the next level. And gap funding lenders for real estate investments are all around you. How do you find them?

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You’ve got your property, you’ve got your mortgage… Now you just need gap funding.

 

Read/Watch this to learn who gap funding lenders are, and where you can find them.

 

What questions do you have about gap funding?

 

Read more here about Gap Funding on Hard Money Mike?

Learn more about gap funding and OPM with these videos.

 

 

5 Ways to Make Money in a Volatile Market

5 Ways to Make Money in a Volatile Market

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5 Ways to Make Money in a Volatile Market

Check out our latest Market Watch videos here: https://youtube.com/playlist?list=PLb…

The current market is going CRAZY with increasing interest rates, rising inflation, and supply chain issues. As a real estate investor, how can you prosper in these times? In this video, we share 5 ways to make money in a volatile market. Check it out! STAY CONNECTED ========================

 

What is gap funding

What Is Gap Funding? And How Do You Get It?

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When to use gap funding and how to attract lenders.

A mortgage covers the bulk of the cost of purchasing a new property. But what about all the costs in-between?

There are some big price tags in real estate investment that bank loans won’t usually cover. You’ll still need to find a way to pay for your down payment, the fix-up cost, and any carrying costs for the property.

How do you fill those gaps?

What is Gap Funding?

Gap funding is the money source you use to cover these extra costs in real estate. Private individuals can lend money to fill the gaps in your investment.

All real estate investors at any stage can utilize gap funding. Typically, gap funding is most useful to investors just starting out, who haven’t yet made or saved enough money to fund their own investments entirely.

However, we also see people who are already multimillionaires with years of investing under their belts use gap funding. It’s a great way to leverage investments at any level.

Where Do You Find Gap Funding?

You might find a few banks and other lenders who do gap funding, but the main way to get it is through OPM, Other People’s Money – think of it as Real People’s Money.

These people can be family, friends, or members of a real estate group. These people don’t necessarily have enough to fund your entire flip, but do have $20,000 to $50,000 sitting in an account or IRA. They don’t want to do the actual work and risk of investing, but they do want the potential for a higher return on their money than they’d get from a bank.

How Do You Get Gap Funding?

Getting people to loan you their money may sound easier said than done. After all, OPM is often either secured by second-lien or unsecured, so you wouldn’t put your money in that situation with just anyone.

There are a few key traits you’ll need to show to attract the people who can provide you with gap funding:

  • Respect their money
  • Protect their money
  • Be honest

Having these qualities will be the deciding factor in someone lending to you over another investor.

Respect Your Lender’s Money

Understand what your lender wants and expects out of the deal, and be sure they get it. Make them feel respected and confident with you handling their money.

Protect Their Money

Treat the money professionally – even more carefully than you’d treat your own cash. Be diligent in arranging the proper liens, proper insurance, and proper documents.

Be Honest

Tell your lender everything that happens with your project. They have a right to know what they’re investing in. It’s better to be straightforward and allow your lender to make their own decisions than to keep secrets about the deal until it comes back to bite you.

Grow Your Funding

If you make your lender feel good after the first transaction, they’ll want to come back for another. Good deals can lead to a web of funding. A lender who has a good experience with you will tell their family and friends that you’re a good person to lend to.

Respecting, protecting, and being honest with your OPM helps you grow. Investing is much easier with gap funding covered by OPM, and it’s possible to someday fund entire projects with OPM.

Learn More about Gap Funding and OPM

If you’re interested in growing your real estate investment business, check out the following resources:

Download our free OPM checklist at this link.

Learn more about gap funding and OPM with these videos.