How to Borrow Yourself Rich
I am including this here as an example of a way to “Think Rich” because most people do not think this way and thus miss the opportunity to get rich.
You can borrow yourself into being rich. It is not for everyone. It requires good analytical ability, a lot of discipline and self confidence. If you tend to be a procrastinator this is not for you. Borrowing yourself rich can best be explained as borrowing to purchase income producing assets or business and repaying the loan with the income from the asset. As the loans are repaid you become a little richer each month.
Buying a Business: You can do this when buying an existing business using the business's cash flow and assets to borrow the needed fund to take over the business. That is how leverage buyouts are done. There are so many ways to finance a business that are specific to the particular deal that I can not give you a step by step how to, you will have to think creatively. The business broker handling the sale will have suggestions and most sellers know they have to finance part of the deal.
I do know of one deal some years ago where a small manufacture of portable buildings sold his business to another businessman with 100% financing. The buyer used a leasing company to fund the production and delivery equipment. The buyer got the seller to co-signed a loan at the bank to pay for the competed inventory, the loan being secured by the inventory with a percentage of the sales proceeds from each portable building sold going to the bank until the loan was paid. The seller then carried the rest of the purchase balance ( the blue sky part) with delayed payments until the bank loan was paid off.
Real Estate is a safer bet: With single family homes borrowing yourself rich is fairly easy. I will assume you are in an area where reasonably priced houses are available. How can you tell if your area is priced correctly? Take the going rental rate for the area you are thinking of buying into and multiply the monthly rent by 100 , the houses need to sell for that amount or less.
For Example, if the rental rate in your area of choice is $1,100 a month, then the most you will want to pay for a rental house is $110,000. Include all your cost, to buy the house and get it into rent-able condition. Let us take a look at the numbers. I am going to make a few assumptions here to simplify the example, you are financing 100%, you are paying the closing cost out of pocket. There is a lot of good information on the Towards Wealth web site (towardswealth.com) about using real estate to get rich and some of the tricks of the trade, I will assume you will be reading those articles.
You buy a house in ready to rent condition for $110,000 you finance the house at 6.5% interest. A 30 year mortgage on $110,000 has a payment of $695.27 add taxes at $225.00 and you have a total payment of $921.00 a month. Rent is $1,100 a month, giving you a positive cash flow of $179.00 a month. To the positive cash flow you add the principal pay down on the mortgage and your total return is $279.00 a month ($179.00 plus $90.00 principal = $279.00).
This is a realistic example taken from a real life situation. What if you did ten of this type of rental. In five years you would be $161,400 richer not including the appreciation on the properties, and not including any rent increases, plus you will have had some income tax savings. Chances are the total would be closer to $250,000 everything considered.
I know I am simplifying things a bit but the results are real enough. I ask you this! where else can you get a part time job that has the potential to pay you $50,000 a year.
Down payment? or I don't have any: Not a problem, the rule is, the less money you have, the more of your time will be required, the more money you have, the less time you will need to spend. Ways to avoid down payment include. Owner financing, buying re-po's direct from banks, pre-foreclosure take overs, using other properties you own as collateral to borrow the down payments, taking on partners who will supply the cash, trading other assets in lieu of cash, and lease purchase to name a few.
So how do you know when to borrow? The simple answer to that question is, when the cost to borrow is less then the return the asset earns.
For example; lets us say you buy a duplex house for $100,000 and the rental income from the property is $1,200 a month or $14,400 a year. All the experiences of taxes, insurance and maintenance add up to $3,000 a year. Your net income is $11,400 a year or 11.4% return cash on cash. Now lets assume you borrowed half of the money or $50,000 at 7% interest. Your payments would be $332.65 a month and the interest would be 3,483.91 the first year. Your return on the $50,000 cash part of the purchase price would be 15% a year.
I have simplified the calculations considerably* and the risk does increase because of the debt, but the principal remains the same. I also assume you have an alternative use for the rest of your cash that pays more then the 7% rate of the borrowed funds.
* To properly calculate the return on a real estate investment on in come producing property you would take into consideration. The purchase price, cash invested, cost to obtain the loan, interest paid, reduction in principal, appreciation, tax benefits from depreciation, cost of insurance, taxes and repairs and other ownership cost.