OPM: BORROW SMART, RAISE CASH, BUILD EQUITY
Build your net worth more quickly: use OPM (other people's money). Nearly all property investors rely on mortgage loans and/or seller financing—and in many instances, equity partners. To profit with property, you need not draw primarily on your own cash. Other people stand ready to provide all of the cash you need. But OPM presents risk as well as reward.
Used intelligently, financial leverage (OPM) magnifies your gains. OPM can increase your cash-on-cash return, magnify your equity buildup (acorns into oak trees), and help you acquire properties that you otherwise could not acquire—if you had to rely exclusively on your own cash balances. Used foolishly, leverage not only increases your chance of loss, it increases the amount of loss you suffer. Smart financing of your investments leads to financial independence and a feeling of security. Dumb financing leads to sleepless nights, drained bank accounts, forced property sales, and loss of reputation.
Today, excessive debt has dashed the hopes of many investors and homebuyers. To help understand why, look back to the faulty advice that (until recently) enticed millions of naïve and ill-prepared Americans to borrow dumb. As Ben Graham says, “The first rule of wealth building: Do not lose money.” How not to use OPM stands even more important to investing than how to use OPM.
THE BIRTH OF “NOTHING DOWN”
In the early days of the get-rich-quick real estate gurus, property prices were shooting ...