Copyright 2006 Geoff MorrisIn This Day And Age Of Uncertain Pension Plans, Rising Unemployment, And A General Feeling That However Hard You Work, Doesn't It Amaze You That Your Bills Just Somehow Seem To Keep Pace With Your Earnings?Want A Solution? Then Use Other People's Money To Make Yours!So, How Does This Work Then, And How Can It Make You Wealthy?Let Me Use A Real Live Example. About A Year Ago, My Friend Mike And I Purchased An Investment Property Each In Middlesbrough. He Paid For It Out Of His Savings, I Paid For It Using 'Other People's Money'.Mike Is Not A Risk Taker. A Nice Bloke, But He Likes To Take Everything Very Carefully Without Taking Any Risks. So He Thought, By Paying Cash For His Property, He Was Minimising His Risk, As He Would Not Have To Be Dependant On Tenant Incomes To Meet His Repayments. But, He Was Not Trying To WIN, And Unless You At Least Try To Win, You Will, Out Of Definition, Never Win!So Lets Examine These Two Investments Side By Side - Mike With His Cash Deal, And Me With My 'Using Other People's' Deal.Mike Drew His L100,000 Out Of His Savings Account (where It Was Making Around 5 Per Annum Anyway), And Luckily Got A Tenant In Place The Day After He Completed. So From Day 1 He Was Earning Some L500 A Month From His Investment.Now Me, I Borrowed 85 Of The Money To Purchase My Apartment, Which Was Going To Cost Me Some L430 A Month With An Interest Only Mortgage. And, As Luck Would Have It, It Took Me Two Months Before I Got My First Tenant, Also At L500 Per Month.So, In The First Year, Mike Earned L6,000, Which, After Tax, Generated Him Around L3,600 In His Pocket, As He Had No Outgoings Such As A Mortgage To Offset His Tax Liability.Now For Me, As I Had A Two Month 'void' Period With No Tenant, My Income From Rent Was Just L5,000. Now, As I Was Paying L5,160 A Year In Mortgage, I Had No Tax Liability, But Looked Like I Lost L160 In Revenue On Balance. If I Had Had A Full Year's Tenancy, I Would Have Actually Made A Surplus Income Of L840.But Now Let's Look At The Capital Gains From Both Of Us.Mike, Who Was Getting 5 In His Savings Account With His L100,000, Saw His Property Go Up In Value By Some 10 Last Year. So He Made Double That In His Property, And Actually Gained Some L10,000 In Equity In His Property, Or A 10 Growth On His Investment, Using All Of His Own Money.Now Me, Being A Tight-wad, And Never Likes Parting With Money, Especially My Own, Also Saw A 10 Appreciation In The Value Of My Property.But Look, As I Had Only Used 15 Of My Money And 85 Of Other People's, My Deposit Of L15,000 Had Returned Me L10,000, Or A 67 Increase In My Investment.If I Had Managed To Get A Deal Where I Only Needed Say 5 Down Payment, My L5,000 Initial Investment Would Now Have Returned Me Some L10,000, Or A 200 Increase In My Capital.What Does This Mean? Well, If Mike Wanted To Buy Another 9 Houses, Making A Portfolio Of 10 Such Houses, He Would Have To Use (if He Had It) Another L900,000 Of His Own Cash, Or ONE MILLION Of Cold Hard Cash That Could Have Been Earning At Least 5 In Any Old Savings Account.Well OK, If Mike Had Bought Another 10 Houses, And They Were All Fully Tenanted, He Would Have Generated An Income Stream After Tax Of Around L36,000 Per Annum, Or A 3.6 Return On His Investment. The Return On His Capital Would Have Been L100,000, Or 10.Now Suppose I Were To Buy Another 9 Such Properties, But This Time, Using A Lot More Of 'Other Peoples' Money?Well, I Would Have Had To Invest L50,000 Of My Own Money, Alongside L950,000 Of Other People's Money.My Net Revenue Income Would Have Been Around L8,400, But By The Properties All Increasing In Value By Some 10, My L50,000 Would Have Generated Me Some L100,000 In Increased Equity, Or 200 Return On My Investment.After Three Years, I Could Probably Sell Say Four Of Those Properties, And Assume The Growth Was 10, 5, 5, And Then Excluding My Deposits, I Could Have Withdrawn Some L85,100 From The Deal, To Re-invest Or To Buy A Few Luxuries - But My Choice - And Still Have Equity In The Region Of L127,650 Plus My Deposits Left In My Other Houses.The Important Thing Here To Realise Is That I Have Actually Created This Extra L85,000 In Cash And The Remaining L127,650 Equity, Mainly By The Use Of Other People's Money!Just Think How Much Mike Could Have Made If He Had Invested His Whole MILLION Alongside 20 MILLION Of Other People's Money.
