So you want to buy property with no cash?
I often get questions like these:
- I don’t have any money. How can I get into property investment?
- How do I start using other people’s money to buy an investment property?
- What is Other people’s money (OPM) and how can it help me in making money?
If you don’t want to make money using other people’s money, there are always options such as REITs and property investment companies in the stock market where you can invest.
Before we jump in, let’s make something clear: though OPM lowers your risk, there’s no such thing as a free lunch. You need to be skilled in what you’re doing when working with other people’s money – they treasure their money and you should treasure it too!
What is OPM (other people’s money)?
Warning! This is not a silver bullet!
Don’t be stupid and over leverage. Also don’t be stupid with other people’s money. You need to bring something to the table. It’s not free money. It’s borrowed money.
So, you found an excellent property deal. Mr Capuccino is planning on selling a 12 bedroom penthouse in Sandton for R 129 999. You know that this is an excellent deal for buy-to-let, buy-to-sell – or even changing this into an AirBnB.
You only have one issue – no cash.
OPM is what the name says – other people’s money. It’s the process of using money that is not your own to make money.
Don’t be stupid
Don’t leverage beyond your means. This is not recommended for beginner investors. You will die a slow and painful death if you do not know the laws that govern money.
The concept of leveraging is often mentioned in the same context of OPM, as it’s often closely related.
Leveraging is a technique where you use borrowed money to exponentially grow your business. In forex and stock market trading, this is often used as follows:
You have R 10.
You borrow R 90.
You’re trading Rand/US$ with R 100 now (of which R 90 is not yours).
When the price changes by 1c, your loss/profit is amplified x 9.
Using OPM with rental property with a bond
Don’t be stupid
Never over-extend yourself. Not all property breaks even from day one. Do your own calculations and be very sure that it’s a good deal.
In the above scenario with the property in Sandton, we could use the bank’s money (or the money of a friend) to pay for the property.
If you get a bank loan, interest will be charged. You can then use a tenant to pay your bond. At the end of the term, you have a property with little or no money that was paid in from your own pocket.
Using OPM with buy to sell
Partnering with other people can help a lot to get onto the property ladder.
For example, Mr. Espresso has a bad credit record, but has cash for a bond and transfer costs/fixing up the property. Mrs. Latte has an excellent credit score, but doesn’t have any cash for the property. They could partner – one bringing the deposit now, and the other being able to get the loan.
Remember to get the legal paperwork sorted before you sign your life away!
There are other methods as well – I have excluded some that I find irrelevant to South Africa or downright stupid (like using your retirement savings). Here are some other methods and ways:
- Seller financing/instalment sales – The buyer and seller go into a contract that the full purchase price will be paid off in 5 years in monthly instalments. This is done with legal paperwork and if the seller defaults on payments, the consequences could be severe!
- Existing financing: In some scenarios, it’s possible to keep the existing financing. One can enter into an agreement that a buyer will pay off the property bond – and that it will be transferred into the name of the buyer only when the bond has been paid in full. This method is often used when transferring bonded properties into companies (that are owned by the sellers in many cases)
- Hard money – some (not-so-liquid) people make use of short term money borrowing to finance deals. These can charge exorbitant fees and interest rates. Be careful out there!
Don’t just think it’s free money because you don’t pay for it from your own pocket.
Did I mention that you need to be careful?
Using OPM and leverage can greatly increase your cash and cash flow, yet all due diligence needs to be taken to ensure the investment is viable.
Educate yourself before embarking on the journey of OPM.