Tuesday, March 13, 2012

OPM and Real Estate Purchases

OPM (other people's money) is a tool to gain serious leverage in real estate investing, often used by Robert Kiyosaki, author of Rich Dad Poor Dad.  The basic principle here is to buy a property with the least amount your personal money, then cash-flow that property via rental agreements.  This has huge advantages and at the same time, can be very dangerous.

When I purchased my Victorian property, I had a very small income and almost nothing in savings.  I managed to dive into this contract for less than $1,000 down and start generating $2,400 cash each year from that initial investment.   With the revisions of modern lending polices in place, it would be impossible to jump into the market like I did.

It was fun reaping the rewards of the big yield when I became a landlord, but one factor kept my profits low and my risk high.... this was the huge DEBT that the deal put on my lap.  If the property becomes vacant I get stuck with a huge bill, thanks to the mortgage.  I find that buying real estate with cash is most sensible option for me now.  Being in my situation back then, OPM was my only choice.

I feel like the main reason I didn't fail was because the houses I purchased were cheap, and never lost value during the declining housing market.  Imagine the others who tried what I did, who were stuck with huge house payments, taxes and declining house values...  From now on if I don't have the cash for it, I wont buy it.  With leverage out of the picture, risks decrease and rewards increase.  This is always a good thing for investors!

Disclaimer: I am not a financial planner, advisor, or accountant. The financial actions mentioned were only suited for my own risk tolerance, strategy, and ideas. Copying another's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

3 comments:

  1. If I may ask. When did you buy the property? I have looked into property to rent out but everyone is now wanting 20% down, 6 months of rent in savings ahead of time, and renters insurance (that's insurance in the rent income not the damage from the tenants that is additional)

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  2. The Victorian house was purchased in December 2006, and the Ranch house in the latter half of 2007. Back in those years it was way too easy to get loans. When trying to get pre-qualified through my mortgage broker for the Victorian house, they tried to deny me because the loan amount was too small. Making under $10/hr they expected and pushed me to get a $120,000 property! I mean really?

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  3. ROFLMAO. Wow deny you for NOT taking a big enough loan. That both surprises me and doesn't surprise me. I suppose their intent was that it not be paid off early and for you to be in perpetual debt as long as possible vs them getting their money back.

    I've been looking around the town I live in. $100k town homes are selling for $50k. The mortgage would be around $400 with today's interest rates which in the market they are in I could turn around and rent for $850. Wouldn't that be beautiful. After everything is said and done though I calculated I needed $20k in cash for all their requirements.

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