How To Invest With NO MONEY Down
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 I say OPM.
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.
I bought my first investment property in 1973. I had no extra money to invest. I was still in the Marine Corps and had just purchased my first home. Rather than let low pay and no money stop me, I signed up for a real estate investment course for $385. Within a few months, I purchased my first investment property, a one-bedroom condo on the island of Maui, for $18,000. The property was in foreclosure, and the bank was desperate to get rid of the unit. The bank let me put the $2,000 down payment on my credit card. The property made me about $25 a month after paying my mortgage and credit card bill, which is an infinite return since I borrowed 100 percent of the money. Once I proved to the bank that I could manage the property, it let me buy two more units. My investing career was launched.
OPM is found in the B and I quadrants of the CASHFLOW Quadrant, and for the most part, people who work in the E and S quadrants are the OP (Other People) whose time and money are being used.
A primary reason Kim and I took time to build a B type of business, rather than an S type, was because we recognized the long-term benefit of using other people’s time. One of the drawbacks to being a successful S is that success simply means more hard work. In other words, good work results in more hard work and long hours.
In designing a B type of business, success simply means increasing the system and hiring more people. In other words, you work less, earn more, and enjoy more free time.
What Exactly is OPM?
Other people’s money (OPM) is a fundamental concept of Rich Dad 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. For example, with real estate that is generally around 70 to 80 percent of the purchase price.
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. 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
Let me show you an example of how using OPM 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.
How to Achieve Infinite Returns
If you know how to use debt—aka OPM (Other People’s Money)—to buy your assets, your returns can be inﬁnite. An infinite return means “money for nothing.” In other words, investors receive income without having any of their own money in the investment.
Using the above example, once I refinance the imaginary property, and pay back my investors I no longer have money in the deal, it’s 100% debt.
To understand this further, if I buy a $100,000 rental unit with my money, and I receive $10,000 a year net income, my cash-on-cash return is 10 percent. If I borrow $50,000 and am still able to receive a $10,000 return, my cash-on-cash return is 20 percent. If I finance the entire $100,000 and still receive a $10,000 return, my return is infinite. Ten thousand dollars flow into my pocket, and nothing comes out. The renters cover my expense, and I receive the income.
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 I started small and worked into the big apartment deals we do today. You can do the same.
Editor, Rich Dad Poor Dad Daily