Chapter 8Choosing from Your OPM Options

Capital stack assembly is a key part of the creativity involved in building a business. There can be a seemingly endless array of options to choose from. Still, as we discussed earlier in chapter 3, there is an order of operations in striving for capital efficiency that can help make sense of your options.

First things first: Begin with OPM. Here, I am referring to interest-paying OPM. If you don't have enough YOM, you can also use forms of OPM to help with equity requirements, which we will discuss later.

Then, when it comes to selecting from OPM options, there is another order of operations: Begin with the longest-term financing you can find. Longer term financings will tend to have lower payment constants, which, as a reminder, represent the relationship between the amount of OPM received and the annual payments required. Low payment constants can be more important than low interest rates. The lower the payment, the greater the free cash flow. The greater the free cash flow, the better the equity returns and the greater the odds of getting close to Mort's Model. The greater the free cash flow, the bigger your margin of safety.

With so many OPM options to select from, how do you go about choosing the right capital stack for you? This chapter will help guide you through an analytical framework that will help you decide.

Purely for illustrative purposes, I will focus on real estate financing decisions, since it is the asset most in my ...

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