Investing in real estate with other people’s money means funding a purchase with borrowed capital, investor equity, or a deal structure that shifts the cash requirement off your own balance sheet. The strategy works when the property’s return exceeds the cost of the capital you brought in. The routes available to you fall into three families: borrowing from lenders, buying directly from the seller on terms, and bringing in partners or investors who put up the money. Each family has its own legal machinery, tax treatment, and exposure to personal liability, and choosing among them is less about which one sounds appealing and more about which one you can execute without getting hurt.
Borrowing From Hard Money and Private Lenders
Hard money loans come from specialized lending companies that underwrite the property rather than you. The property is the collateral, and approval hinges on the loan-to-value ratio more than your income or job history. Interest rates typically run 8% to 15%, and some lenders go higher depending on the deal’s risk. Expect origination fees, called points, of roughly 1% to 3% of the loan at closing, sometimes more. These loans are built for speed and short holds, not long-term ownership.
Private money works differently because the capital comes from an individual — a friend, a family member, a colleague, or someone you met at a real estate event with idle cash in a savings account or self-directed retirement account. Terms are fully negotiable. Most private loans use interest-only monthly payments during the project with a balloon for the principal at the end. Miss that final payment and the lender can foreclose, exactly as a bank would. The relationship may feel casual. The default consequences are not.
Seller Financing and Subject-To Deals
Seller financing turns the owner into the bank. Rather than getting a mortgage, you negotiate a payment plan directly with the seller. The deed transfers to you at closing, and the seller carries a note for whatever balance you didn’t pay upfront. You make monthly payments at the agreed rate, and the seller holds a lien until you pay off or refinance. The arrangement is documented through a promissory note and a mortgage or deed of trust recorded in the public land records.
Subject-to is a separate structure. You take ownership while the seller’s existing mortgage stays in place. The deed transfers to you; the loan stays in the seller’s name and on the seller’s credit. You take over the monthly payments. The appeal is inheriting an interest rate the seller locked in years ago. The risk is the due-on-sale clause built into nearly every standard mortgage, which lets the lender demand the full balance the moment title changes hands.
Federal law, specifically the Garn-St. Germain Depository Institutions Act, generally makes those clauses enforceable, with narrow exceptions: transfers to a spouse or children who will live in the property, transfers on the borrower’s death, and transfers into a living trust where the borrower remains a beneficiary.1Office of the Law Revision Counsel. 12 U.S. Code 1701j-3 – Preemption of Due-on-Sale Prohibitions A subject-to buyer outside those categories is betting the lender doesn’t notice or doesn’t act. If the lender does call the loan and you can’t refinance quickly, you lose the property. The seller keeps the mortgage on their credit, and any missed payment damages their score and can expose them to deficiency liability.
Partnerships and Syndications
Joint Ventures
The simplest OPM structure is a two-person partnership where one partner brings the capital and the other brings the deal and the labor. The capital partner funds acquisition and rehab. The working partner finds the property, manages the renovation, and handles day-to-day decisions. Ownership splits are negotiated, and that split drives each partner’s share of rental income, tax deductions, and eventual sale proceeds. Most experienced investors hold title through an LLC rather than personally, which keeps property-level liability contained.
Every partnership needs a written operating agreement covering the scenarios nobody wants to imagine: one partner wanting out, a partner’s death, a deadlock over whether to sell, and who has authority to take on additional debt. Skipping those provisions because the relationship feels solid is the most common expensive mistake in real estate partnerships.
Syndications
A syndication scales the same idea to larger assets like apartment buildings, self-storage, or commercial property. A general partner (or sponsor) runs the deal. Limited partners contribute the money, receive quarterly distributions, and stay out of management decisions.
Returns flow through a distribution waterfall. Limited partners typically receive a preferred return, often 6% to 10% annually on invested capital, before the general partner takes any profit share. Once the preferred return threshold is met, remaining profits split between the general partner and limited partners under the deal terms. The general partner also commonly charges an acquisition fee for putting the transaction together and an asset management fee during the hold. Those fees come out of investor capital or property income and are disclosed in the offering documents.
Securities Rules When You Raise Investor Money
This is where most aspiring syndicators get into trouble. When you accept money from investors in exchange for a share of profits from a real estate deal, you are selling a security. Federal law requires the sale of securities to be registered with the SEC unless a specific exemption applies.2U.S. Securities and Exchange Commission. Exempt Offerings Selling unregistered securities without a valid exemption is a federal violation, and not knowing the rule is not a defense.
Nearly all real estate syndications use Regulation D. Two versions matter. Under Rule 506(b) you cannot publicly advertise the offering, but you can sell to an unlimited number of accredited investors plus up to 35 non-accredited investors in any 90-day period; this is the traditional friends-and-family structure built on pre-existing relationships. Under Rule 506(c) you can advertise publicly, but every purchaser must be an accredited investor and you must take reasonable steps to verify that status, with self-certification alone insufficient.
Under either rule, you must file a Form D notice with the SEC within 15 calendar days after the first sale of securities in the offering.3U.S. Securities and Exchange Commission. Frequently Asked Questions and Answers on Form D Many states also require a separate notice filing and fee, even though Rule 506 offerings are exempt from full state registration.
An accredited investor currently qualifies through a net worth above $1 million excluding the primary residence, or income above $200,000 individually ($300,000 with a spouse or partner) in each of the prior two years with a reasonable expectation of the same in the current year.4U.S. Securities and Exchange Commission. Accredited Investors If you plan to raise capital from investors, hire a securities attorney before taking a single dollar. The legal fees feel steep on a first deal. The penalties for getting this wrong are much steeper.
Tax Consequences That Shape Your Return
Passive Activity Rules for Limited Partners
If you invest as a limited partner in a syndication, the rental income and losses reported on your Schedule K-1 are almost always classified as passive activity.5Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) Passive losses can only offset passive income; you generally cannot use them to reduce W-2 wages or business income. Unused losses carry forward until you either generate passive income to absorb them or sell the property.
The main exception is qualifying as a real estate professional, which requires more than 750 hours per year in real property trades or businesses in which you materially participate, and that time must exceed half of your total personal services for the year.6Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules Limited partners face a further restriction: they cannot claim active participation for purposes of the $25,000 rental loss allowance available to other rental owners.5Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) The depreciation deductions that make syndication pro formas look attractive often get trapped by these rules, and investors who don’t understand that going in are consistently disappointed at tax time.
Self-Directed IRAs and Debt-Financed Property
Private lenders sometimes fund deals through a self-directed IRA. The IRA’s tax shelter works cleanly on all-cash investments. The moment the IRA uses debt to acquire or improve property, income attributable to the debt-financed portion becomes subject to Unrelated Business Income Tax. The IRS taxes that portion at trust tax rates, which compress quickly: the 37% bracket kicks in at just $14,450 of taxable income.7Internal Revenue Service. Unrelated Business Income Tax The calculation is based on the ratio of acquisition indebtedness to the property’s adjusted basis.8Office of the Law Revision Counsel. 26 U.S. Code 514 – Unrelated Debt-Financed Income Any IRA with $1,000 or more in gross unrelated business income must file Form 990-T, even if deductions and depreciation reduce the taxable amount to zero.
If your IRA buys a rental property with a 50% loan-to-value mortgage, roughly half of the net rental income gets hit with UBIT. That tax erodes the return enough that some investors decide leverage inside the IRA isn’t worth it, especially for buy-and-hold rentals with modest cash flow.
Recourse vs. Non-Recourse Loans
Every OPM deal should start with one question: what happens to me personally if this goes wrong? The answer depends on whether the loan is recourse or non-recourse.
A recourse loan lets the lender pursue your personal assets if the property doesn’t cover the debt. If you default and the lender forecloses and sells for less than what’s owed, they can sue for the deficiency. That judgment can lead to garnished wages and levied bank accounts. Most hard money and private loans are recourse, and many require a personal guarantee on top of the property collateral. The personal guarantee is what makes the “other people’s money” framing somewhat misleading. You are using their capital, but you are still on the hook if the deal doesn’t perform.
A non-recourse loan limits the lender’s recovery to the property itself. If the deal fails and the property sells short, the lender absorbs the loss. Non-recourse terms typically come with higher interest rates to compensate for that added risk, and they usually include “bad boy” carve-outs that convert the loan to full recourse if you commit fraud, mismanage the property, or violate specific covenants. True non-recourse financing is more common on larger commercial deals and syndications than on single-property flips.
What a Fundable Proposal Looks Like
Whether you’re approaching a hard money lender, a private investor, or a partner, the quality of your proposal separates funded deals from rejected ones. Lenders and investors see dozens of pitches. The funded ones share the same characteristics: specific numbers, realistic assumptions, and clearly documented exit strategies.
Start with a property-level pro forma projecting income and expenses over the expected hold. Every repair should be itemized with written contractor bids, not estimates pulled from a renovation blog. An appraisal or a detailed comparative market analysis establishes current value and projected after-repair value. Your exit strategy section should explain your primary plan, typically a refinance into a conventional long-term mortgage or a sale, plus a backup if the first plan falls through.
For conventional financing, you’ll likely fill out the Uniform Residential Loan Application, Fannie Mae Form 1003, capturing your financial profile, employment history, and property details.9Fannie Mae. Uniform Residential Loan Application (Form 1003) For hard money and private lenders the format is less standardized, but the information is similar: bank statements showing available liquidity, your credit profile, and a clear scope of work for any planned renovations. A credit score above 700 strengthens your position with most lenders, though minimums vary widely by loan type and lender. Private and hard money lenders are often more flexible on credit than conventional banks, which is part of why investors use them.
What Actually Happens at Closing
Once a lender or partner commits, closing runs through a title company or a real estate attorney. The title company searches public records to confirm the seller actually owns the property and to identify any existing liens, judgments, or encumbrances. Any issues need to be resolved before closing, or you risk inheriting someone else’s debt.
Nearly every lender requires a lender’s title insurance policy as a condition of funding. The policy protects the lender against title defects that surface after closing, such as undisclosed liens, forged documents in the property’s chain of title, or boundary disputes. If a covered problem can’t be resolved, the title insurance company pays the lender for the remaining loan balance.10U.S. Department of the Treasury. Exploring Title Insurance, Consumer Protection, and Opportunities for Potential Reforms That policy protects the lender, not you. If you want protection as the buyer, purchase a separate owner’s title policy at closing.
At the closing table you sign two key documents. The promissory note establishes the debt: interest rate, payment schedule, maturity date, and default consequences. The mortgage or deed of trust pledges the property as collateral. The title company or attorney records the mortgage or deed of trust with the county recorder, creating a public record of the lender’s lien and giving the lender legal priority against any later attempt to sell or refinance without paying off the loan.
For renovation projects, don’t expect the full loan amount handed over at closing. Most hard money and private lenders fund the purchase price at closing and place the rehab budget in an escrow or construction draw account. As you complete phases of the renovation, you submit a draw request with documentation. A third-party inspector verifies the completed work before the title company releases the next tranche. That controlled disbursement protects the lender from handing over money that never gets spent on the property, and it keeps the project on budget, which protects you too.
Closing costs on OPM deals add up quickly. Between origination fees, title insurance premiums, recording fees, attorney fees, and inspection costs, plan for the total to run several thousand dollars above the loan amount. Build those numbers into your project budget from the start, not as an afterthought at the closing table.