We talk a lot about using OPM ‒ “other people’s money” ‒ in the real estate investment world. So it’s worth taking a few minutes to talk about how that’s actually supposed to work…
How Not to Do This
For example, here’s what it doesn’t mean: using a credit card to purchase some consumer item, like a new stereo system or whatever. Sure, you’re using OPM (the credit card’s bank in this case), but…
You’re merely borrowing money you don’t have… which you’ll have to pay back with a very high interest rate… to buy a financial liability ‒ something that doesn’t produce cash flow for you. (Heck, even if you used a credit card to make a down payment on a house ‒ and there are “gurus” who have actually encouraged folks to do this ‒ it just doesn’t make sense, because the interest is way too high. And why would you do that if you already had the cash?)
Do This Instead…
Here’s what using OPM really means:
Start from a position of strength;Use your financial assets to get access to OPM at a reasonable rate of interest… which you can do, because you’re going to be a financial asset to them because of your ability to produce capital;Use this OPM to invest in a financial asset… something that pays off your creditor while also producing cash flow for you. In other words, the asset pays for itself (and then some);
End up with plenty of cash flow, greater financial assets than you started with (because your equity in the asset increases as it pays off both the interest and principal on your loan), and the ability to make further investments because of your overall increased financial strength.
Very different from buying a high-end stereo system with a credit card…
This isn’t rocket science or anything, but in some ways it’s the mindset, the psychology behind it, that’s so important. So let’s break that psychology down a bit, using rental property as an investment for our example.
It’s a Powerful Approach
First, notice that you’re starting from a position of strength: you’re using money you already have to purchase an investment property. You’re leveraging your capital… to get access to OPM.
This is very different from desperately begging someone (or some institution) for money you don’t have because that’s the only way you can get on the playing field. “Please, please, please loan me some money so I can buy this house. I promise I’ll pay you back. Really! If I could make a down payment, I’d do it. But I just need a break right now.” That’s a very weak mental and financial position from which to acquire OPM.
(In fact, as I explain here, if you don’t have enough capital to buy your first property via conventional financing through a bank,
But when you’ve already got capital, it just makes sense to invest only enough to acquire financing for the balance. Why pay the full $200,000 to buy a house, when you could pay only $50,000 up front, leaving you with $150,000 to use for other investments? After all, you know you’re using the loan to purchase an asset, not a liability.
Which is important, because a financial asset like a rental house pays for itself in multiple ways…
Your tenant pays off your interest and pays down your principal for you. In other words, they pay your loan ‒ not you. This means you now have two forms of OPM working for you: the bank’s, who loaned you the money beyond your down payment to acquire the house in the first place; and the tenant’s, who is now paying the loan on your behalf. That’s pretty sweet!
But there’s more. Over time, as your tenant pays down your principal, your equity in the asset increases. So you have greater financial assets than when you started (and don’t forget that the house’s value will appreciate over time as well).
Furthermore, the rental property isn’t just paying for itself ‒ it’s generating cash flow for you. Cash that goes straight into your pocket.
What all this means is… ten or fifteen years down that line, your equity in the rental house is considerable, you’ve been collecting cash every month from your tenants, and you haven’t paid a cent beyond your initial down payment to purchase the property.
In fact, if you had the $200,000 to begin with like I mentioned above, you could have used the other $150,000 to invest in three other rental homes, and you would have seen this same explosion in your portfolio happen across four different investment properties!
That’s how you use OPM.
(And I haven’t even touched on the tax benefits! For more details about much of this, see “The Four Returns in Real Estate” here.)
Always Build On Your Strengths
This has nothing to do with being desperate and scrambling around hoping someone will “give you a loan” so you can “get rich in real estate.” It’s about using your knowledge and skills to build capital… and using that position of strength to get access to OPM… so you can multiply your financial assets many times over, getting the absolute greatest mileage out of your own capital.
Your creditors win, because your tenants pay them back for you. Your tenants win, because you’ve provided a high quality rental house for them to live in. And you win, because you’ve wisely increased your cash flow, multiplied your assets, and transformed your financial future … by utilizing OPM the right way.
Got any questions about OPM, if you’re ready to invest in real estate, or the Four Returns in Real Estate? Give us a call at (801) 990-5109 orschedule an appointment here. We’ll be happy to help you tap into the power of OPM as a real estate investor ‒ in the way that suits your situation best.