How can one man lift a big rock? Why does Donald Trump win so often in high-stakes negotiations? How can you buy five income producing properties with very little of your own money?
You’ve heard me talk about it often. It’s leverage. Let’s take a quick look at why the concept of leverage is so crucial to growing wealthy. Leverage is the ability to use a small amount of your own money to control an asset of far greater value. For example, when you put down 20% on the purchase of a single family residential home, you are essentially using the bank’s money to extend your own buying power.
Assume that you have $100,000 cash to invest. You could find a $100,000 house and purchase it outright. A better idea would be to find five single family residential properties each costing $100,000. Rather than plow all your resources into one property, put down 20% on all five, let the bank loan you the rest, and suddenly you have a portfolio of five income producing properties.
If you’ve done your homework and chosen appropriate deals that provide positive cash flow immediately, you’re sitting in the proverbial catbird seat. Later, you’ll refinance all five loans in seven to twelve years and use the resulting proceeds to buy as many properties as you have the down payments to afford. You should NEVER pay off your loans, but rather frequently refinance into more and larger real estate deals.
Here’s the reality of this type of investing. You use other people’s money (OPM) to buy assets that you will eventually own. Along the way, you also use OPM to cover the monthly expense of your investment, which is the mortgage payment. How do you do this?
By renting the place out! Assuming the deal is right, which it should be when you do your homework, a tenant’s monthly rent payment should cover the mortgage, all associated expenses, and still leave you with a little cash in your pocket. This is called positive cash flow.
Here’s the bottom line. There is no other asset which allows you to rent it out! Don’t try this in the precious metals market or on Wall Street. They’ll laugh you out of the place.
Let’s grab a cup of coffee and discuss the how investing can help you with your wealth goals! Call me anytime at 425-330-0663.