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Leveraging the Power of Other People’s Money
Many people have an aversion to borrowing money, and for good reason — it costs money to spend money you don’t have, and when you spend money you don’t have, you don’t have money to pay back the money you borrowed. It certainly does cause a lot of problems for some people.
However, very lucrative businesses and individuals have made their fortunes on borrowed money. The not-so-secret secret is to use that borrowed money to earn far more money than you’re paying to borrow that money. That’s called leverage. You use a little of the money you have and a lot of other people’s money (OPM) to make a much bigger investment than you could otherwise afford on your own. Do it right, and you can pay off the loan and pocket a handsome profit.
With house flipping, your goal is to move as much house as you can with as little of your own money as possible. If you invest $100,000 of your own money in a property, for example, and you flip it for a profit of $20,000, you make a 20 percent profit on your $100,000 investment. On the other hand, if you invest $20,000 of your own money, borrow $80,000, and sell the property for $120,000, you earn closer to a 100 percent profit, because you’re seeing a $20,000 profit on $20,000 of your money. (I say closer to 100 percent, because these numbers don’t account for interest on the $80,000 borrowed, holding costs, and other factors.)