Time to Chuck Conventional Financial Advice

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Dear Reader,

I’m often asked, “How can I get rich in real estate?”

Behind this question is a different question: “How can I get the money I need to invest in real estate?”

More often than not, the people asking me these questions have had ingrained into them from an early age that saving was a means to getting rich and that if they wanted to invest, they needed to use their own money.

Both are myths that I want to discuss as a foundation on how the rich use debt to get rich in real estate — and how you can too.

There’s no doubt about it, from an early age we teach our children the value of saving money.

“A penny saved is a penny earned,” we chime. And when they are a bit older, we spin tales of the magic of compounding interest. Save enough, children are told, and you’ll be a millionaire by the time you’re ready to retire.

Of course, we don’t tell them about historically low interest rates.

Or the power of inflation to eat away at the value of money over time so that being a millionaire is worthless by the time you retire.

Those are inconvenient financial truths.

It seems as if the “wisdom” to save your money is timeless in that it won’t go away, even though it’s proven to be wrong.

It was true during the era of the gold standard because gold was real money that held its value. But it stopped being true after Nixon took us off the gold standard and left us with the unbacked fiat dollar.

I still buy gold to help preserve my wealth. I’m a big advocate of gold because of that reason. But I don’t save paper money that only loses value with time. Neither should you.

But even today you find “financial experts” who push the “save to be a millionaire” myth.

The other side of the save to get rich myth is that you need to use your own money (and a lot of it) in order to invest. This is a byproduct of the cultural belief that debt is bad and savings are good.

Often, people will say that investing in real estate is risky, but if you’re going to do it, try to keep your debt as low as possible. Use your own money and pay off the debt as fast as you can.

Nothing could be more wrong. And it stems from a fundamental misunderstanding about debt, which can be both good and bad.

Let’s take a moment to define what I mean by bad de‌bt and good debt.

Bad de‌bt is money that takes money out of your pocket. It makes you poorer. This can be credit card debt from purchases for things like clothes or TVs. It can even be the mortgage for your personal home.

In short, if it’s not making you money, it’s bad de‌bt.

Good debt is another story, and most people aren’t even aware that it exists. Good debt puts money in your pocket month in and month out. How can this be? Glad you asked. Let’s talk about a concept called OPM, or other people’s money.

Those who are the most successful investing in real estate understand that the best way to get a high return is to have as little of their own money in a deal.

Rich real estate investors spend their time finding the best deals and then present them to other investors who are willing to use their money to fund the deal.

When structured right, OPM allows a real estate investor to secure a valuable, high-return, cash-flowing asset for little to nothing.

(If you want to learn the secret to getting rich in real estate without much money and without working hard, go here now).

Below, I show you why using other people’s money is the best way to get rich in today’s world, much better than using your money. Read on to learn more.

Regards,

Robert Kiyosaki
for The Daily Reckoning

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Use Other People’s Money for Infinite Wealth

There are two ways to get rich. One way is to use your own money. The other way is to use other people’s money, or as we call it at Rich Dad, OPM. One (using your own money) provides small-to-modest returns, takes a long time to pan out, and requires some financial intelligence.

The other (OPM) provides large-to-infinite returns, creates incredible velocity of money, and requires a high financial intelligence.

Which one would you prefer to use?

Good Debt and Other People’s Money?

Other people’s money (OPM) is a fundamental concept of my wealth strategies and a sign of high financial intelligence. By using both good debt and OPM, you can dramatically increase your Return on Investment (ROI) — and you can even achieve infinite returns.

Good debt is a type of OPM. By way of reminder, good debt is any debt that puts money in your pocket. By contrast, bad de‌bt takes money out. So, a car loan, for instance, is bad de‌bt. You pay for it each month while the car provides no income and in fact depreciates the minute you drive it off the lot.

Good debt, by contrast, would be a loan for an investment property where the rental income pays for the expense of the property, including the debt service, while also providing monthly income.

The downside to good debt is that you can generally only borrow a certain percentage of an asset’s purchase price. In keeping with our real estate example, that is generally around 70 to 80 percent of the purchase price.

Breaking this down, let’s use an example of a $100,000 property for simplicity’s sake. In a traditional deal with a bank, you can only borrow around $70-$80K towards the property. The rest of the money must be made up of equity from another source.

Other People’s Money for Higher ROI

Because of this, you have two choices when you find a worthy investment: use your own money or use other people’s money for the equity needed above and beyond the loan. Provided you structure the deal well, the more you can use other people’s money, the higher your return will be.

In the case of our real estate example, let’s run a few scenarios.

Scenario 1

$100,000 purchase price

$80,000 loan at 5% interest

$20,000 of your own money for equity

Running through a simple mortgage calculator, your annual cost for this loan would be about $8,500.

Assuming you have an income from the property of $11,000 a year after expenses are paid, your total net income would be $2,500 ($11,000 – $8,500).

Your return on investment for this would be $2,500/$20,000 = 12.5%.

Scenario 2

$100,000 purchase price

$80,000 loan at 5% interest

$20,000 OPM at 7% interest

You get paid 50% of net operating income as the finder of the deal.

In this case, your annual loan costs would still be $8,500, but you’d also have an additional cost of around $1,500 for the other people’s money you borrowed for equity based on an assumed 7%. So, total loan and OPM costs would be $10,000.

Again, assuming you have an income from the property of $11,000 a year after expenses are paid, your total net income would be $1,000 ($11,000 – $10,000).

Your fee for putting the deal together would be 50% of the NOI, in this case, $500 (50% x $1,000).

Your return on investment for this would be infinite because you’re making $500 without any money in the deal.

These, of course, are just small numbers for example. In the real world of investment, you can do this at scale and make massive returns and also, as in this example, infinite returns. But it takes high financial intelligence.

Would Anyone Really Give You Their Money Like This?

Many people think it’s a fantasy world that people would just give you money to invest, but that couldn’t be further from the truth. The reality is that most people don’t have time to find good deals. Instead, they rely on people with proper financial education, skill set, and drive to bring deals to them.

My real estate advisor, Ken McElroy, has perfected using OPM. His company, MC Companies, buys apartment buildings. He does all the hard work of finding deals, doing the due diligence, negotiating with owners and lenders, and handling management. In return, people line up hoping to invest their money with him.

Today, Ken does big deals that require a certain type of investor. Not just anyone can invest with Ken. But he started with small deals, like the ones I’m writing about today and worked his way up to big deals.

The Power of Other People’s Money At Scale

As I mentioned earlier, you can use OPM to substantially increase your returns and secure even more assets at scale. Let me show you an example of how that works.

Let’s say that I have $100,000 to invest. I could use that to put down 20 percent on five properties. But using the concept of OPM, I’d rather use that $100,000 to put down 5 percent on 20 properties. I can do this by finding 20 great deals and lining up investors to invest in them.

Here’s how the math works out.

The bank would lend $80,000 for each property, and I would divide my $100,000 into twenty $5,000 segments, using OPM to raise the other $15,000 needed for each property. Again, at 5 percent interest, the payment on the loans would be around $500 per month.

Let’s assume that we’ll pay a little more for our investors’ money and give them 7 percent interest. The money owed to them would be a little less than $100 per month — but we’ll go with $100 to make it simple. So, our total costs would be about $600 per month.

That means we’ll have a cash flow of about $200 per month, which we’ll split with our investors 50/50. We’ll pocket $100 per month or $1,200 per year, and our investors will pocket $100 per month or $1,200 per year.

Adding up the total return for all 20 deals, that’s $24,000 per year cash flow, a return of 24 percent. Not only am I making 6 percent more per year than if I just used my money, but I also have ownership in 20 assets instead of just 5.

Later I can refinance these properties, pay off my investors, get my investment back, and continue to receive cash flow from the 20 properties — an infinite return.

Again, I’m using very simple math here. In real life, the numbers are more complicated and much larger. But the principles are the same. Investing with Other People’s Money takes a high level of financial intelligence. But both Ken McElroy and I both started small and worked into the big apartment deals we do today. You can do the same.

(To learn how to make serious money in real estate starting with as little as $10 and without working hard, go here now).

Be diligent. Continue to increase your financial education. Work hard. And master the fundamentals of good debt and OPM, and you will become wealthy.