Back as promised! Today I’m here to share with you how you can use debt to make yourself wealthy just like the rich do. Have you ever wondered why your checking account is free? Banks need your deposits so they can lend money. Banks can’t make money until they have your money to lend. At this point, you have two choices: Use bank debt to make you rich, or use bank debt to make others rich. Great wealth is founded on the use of debt.
There is good debt, and there is bad debt. If you borrow money and spend it on something that goes up in value, that’s good debt. If you borrow money and spend it on something that will go down in value, that’s bad debt. You use good debt to enhance your situation and increase your net worth. You should avoid bad debt altogether. Debt is leverage.
Everything you use it for will be magnified, good or bad. If you borrow money for a liability like a car that will eventually be worthless, you are magnifying your cost negatively. Bad debt creates a liability that takes money out of your pocket. Using debt as leverage can also be an extremely positive experience when you are buying assets. My business uses debt and leverage to create wealth for my investors by purchasing assets, specifically multi-family property. These properties not only produce a monthly cash flow, but they grow in value over time using sound management principles. A good example of using good debt and leverage is when a group of investors, including Robert and Kim Kiyosaki, bought a 288-unit property located in Broken Arrow, Oklahoma, a suburb of Tulsa.
This property was well located, and we had several opportunities to increase the revenue and decrease the expenses. At purchase, the property appraised for over $14 million. Value is always based on the net cash flow. Using the appraisal, the bank allowed us to assume the first mortgage of $9,750,000 at 4.99 percent interest rate. This is an example of good debt.
The bank gave us these loans because the property had a high occupancy rate, and they knew the rents we would collect from the residents would more than pay the monthly mortgage payments. We raised $3.4 million from investors for the down payment and for capital needs. All along, our strategy was to install new washers and dryers in all the units, which could eventually get us an additional $25 in rent per unit, a total of $86,400 in additional income annually. (Math: 288 units x $25 x 12 months = $86,400). In just three and half years, we have been able to increase this property’s annual net operating income by over $300,000. The original mortgage has decreased more than $600,000 because we paid the mortgage using the residents’ rental payments during that same period of time. Today, this property is now worth about $20 million. The value is increased because the net cash flow increased. By using good debt and leverage and with just $3.4 million down, this property’s value has increased by over $6 million, nearly $2 million a year.
The annual cash flow also increased by over $300,000 and is distributed to the investors. The original business plan was always to refinance using new debt and to leverage and return the original investor equity. In late 2011, we plan on refinancing this property with new debt and leverage with a new $15 million low interest fixed-rate loan, which will pay off the existing $10 million in loans and leave $5 million to distribute. There is nothing better than returning investors’ money. In this case, if the proceeds are $5 million, we will return not only the original $3.4 million but an additional $1.6 million. Don’t forget the investors also receive a nice monthly cash flow while the money is invested! Once the investors receive their money back in full, their investment in this property will be zero. The “returned original investment” and. additional proceeds are tax-free because it is a refinance. In 2012 with a new loan in place, the property will continue to pay out cash flow to all the investors, which will create an infinite return. I do want to emphasise that this scenario was planned from the beginning. Investors using leverage and debt are able to reap the rewards of the increased value on the “loaned” amount. If you use good debt and buy assets that generate cash flow, you can become very wealthy.
HOW I BENEFITED FROM KEN’S METHOD
My family and I are now one of the true testimonies of Ken’s method. The January 1st 2013 fuel subsidy crisis hit us so hard that my parent was only survive on my sister and I monthly salary. Then my mum as if she read or heard of Ken’s method suggested we move in to our new house even if it was not completed. And the only way to do that without dying of hunger is to get a loan. My dad collected a loan and avoid the bad investment in debt (which was to use the loan money to complete our new house so we move in), and invest the loan money on the old house (by renovating the house, add more rooms, built standard toilets, and well position shops).
But while renovating our old house, renters where giving us money to complete our new house and move in waiting for the renovation to complete so we pay back our debt which we did by renting out the complete sixteen rooms including four shops. Two years later, we paid back the debt and still have our old house (asset) giving my mum money to start a profitable business, taking good care of all our needs and enhance our new modern house (liability) to my dad taste.
If my family and I survive the crisis by not. saving what we had or invest what we borrowed on our new house (bad investment in debt), but utilised what we borrowed added with what we had and invest in our old house (now our asset). I believe you can also help your parent to stop blaming the governments who can never solve the crisis to your favour but to start without fear borrow even from the bank like my dad did and invest on real estate which is the easy way to pay back and still live a millionaire lifestyle. I’ll stop here. Email me your questions here (trulegendfilms@gmail.com) and I will not fail to help you.
My next post will be on how to use other people money to invest – the secret of the investors.
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