My Secret To Investing With No Money
Standing on the beach at the age of 12, looking at my rich dad’s newly acquired piece of real estate, my mind was opened to a world of possibilities that did not exist in my home.
I realized that it was not money that made my rich dad a rich investor. I realized that my rich dad had a thinking pattern that was almost exactly the opposite – and often contradicted – the thinking of my real dad.
I realized that I needed to understand the thinking pattern of my rich dad if I wanted to have the same financial power he had. I knew that if I thought like him, I would be rich forever. I also knew that if I did not think like him, I would never really be rich, regardless of how much money I had.
Rich dad had just invested in one of the most expensive pieces of land in our town, and he had no money. I realized that wealth was a way of thinking and not a dollar amount in the bank.
Standing on the beach, I finally worked up the courage to ask my rich dad, “How can you afford to buy these 10 acres of very expensive oceanfront land when my dad can’t afford it?”
Rich dad then gave me an answer I have never forgotten. He put his arm around me and we turned and started walking down the beach at the waterline.
My rich dad said, “The poor and middle class have a hard time getting rich because they try to use their own money to get rich. If you want to get rich, you need to know how to use other people’s money to get rich…not your own.”
The “L Word”: Leverage
Leverage is simply using debt —or borrowed money—to increase your ROI to achieve infinite returns. The more you leverage and the faster you re-employ your money, the faster you will build your wealth. This is actually one of the secrets of the rich.
The rich use good debt to grow their worth and they invest in cash-flowing assets using Other People’s Money (OPM)—both the bank’s and investors’. The downside to debt is that you can generally only borrow a certain percentage of an asset’s purchase price. In real estate, you can generally borrow around 70 to 80 percent of the purchase price.
Because of this, you have two choices when you find a worthy investment: use your own money or use other people’s money. Provided you structure the deal well, the more you can use other people’s money, the higher your return will be.
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.
Leverage With OPM
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.
Ken says, “Leverage is the ultimate power of real estate.”
Leverage is my favorite thing about real estate, and my strategy is to only invest with OPM.
Think about this. If Ken’s buying power was limited to his savings account, he might miss out on many opportunities. So he has built tremendous relationships with other investors and banks to harness buying power. He is a master at raising capital and is never constrained by using his own money.
If you’re worried about the state of the economy and your investments in the market, then you should watch this jaw dropping video now.
Leverage With Equity
In 2004, Ken finished construction of a 208-unit property located in Goodyear, Arizona, which cost him $13.8 million to build.
Upon completion, it appraised for $16.3 million. He received numerous offers to sell this property and brokers were standing in line for the listing.
As tempting as it was to walk away after two years’ work with $2.5 million in cash, he did not sell it.
Had he taken the $2.5 million gain, he would have been forced to place that money back in the market to avoid a pretty hefty tax bill. Sure he had appreciation, but he also had what is known as a “taxable event.” Imagine the tax bill of 30 percent on a $2.5 million gain. That’s an unnecessary $750,000 tax payment.
So instead of selling, he could refinance the property and pull out what equity he could. There is no taxable event, and in this case, you are not forced to put the money into another investment.
In the case of the 208-unit property, he would refinance and use the equity that he pulled out of the property to pay back our investors with interest.
Leverage By Contract
In the stock market, we can use contracts to help us gain leverage. These contracts give a person the choice to buy or sell a stock at a set price or to simply walk away from the deal completely. In the market, this type of choice is called an option.
Andy Tanner, Rich Dad Advisor on paper assets, says, “With options, we have the ability to leverage our money without going into debt at all.”
Let’s use an example of a stock with a price of $50 per share today.
The investor calls his broker and says he wants to buy a call option to buy 100 shares of stock at $50 per share. He might pay $1 per share for that call option, costing him $100 (each option covers 100 shares).
Now, as Andy Tanner says it’s not exactly zero because you’re still paying only $1 per share, but it’s really close to zero. The more education, the closer to zero you can get.
Regardless of where you stand currently, related to using leverage, the possibilities are limitless.
They are literally infinite.
It’s a shame that this concept is not taught properly in school, for it is one of the keys that can allow people to move from poverty to affluence, and from survival to abundance.
It’s worth studying and practicing.
Editor, Rich Dad Poor Dad Daily