Before We Begin…
Let’s discuss two very important points: First, leverage is not for everyone. And by leverage, I mean controlling a larger amount of money with a smaller amount of money. If you don’t have 1) a solid cash reserve and 2) the basic financial discipline of spending-less-and-saving-more, I don’t recommend the use of leverage. You can easily get yourself into a bad position financially.
A good proverb to go by is, “Only borrow money when you don’t need to.”
Point two is that leverage is an amazing way to accelerate yourself into financial freedom. Because you can use OPM (other people’s money), you can get where you want to go much faster than you could on your own. I’ll give you one classic example and two creative examples of how to use leverage.
Real estate is your classic use of leverage. VA loans are 0% down. FHA loans are 3.5% down. Many HML and PML will only require 10% to 15% down. Banks commonly ask for 20% down. What are you doing? You’re purchasing, let’s say, $250,000 worth of an asset for $25,000 down. The rest you are leveraging.
Ready to get creative?
A lot of people have a difficult time using their imagination when it comes to leverage. They rule out certain possibilities, either by ignorance, denial, or claiming something is “too risky.” Before I go into some of these ideas, I will say this: Most banks will not lend money for you to lend money. Read that again. Clear? Clear. Okay, here we go.
Story #1: I received an offer from my credit card later last year. It was for a line of credit at 7% APR over five years with no loan origination cost. I checked the details of the agreement, and it said nothing about the use of the capital. I could use it however I wanted! So, what did I do? I called up my boy, Bryan, and asked what kind of APR he could give me over five years. It was… not low. So, I borrowed money at 7% and lent it out for much higher. Not only did I pocket the difference, but it cost me (hear this) zero out of pocket. Meaning, my return was technically infinite. A free, $200 a month for five years.
Or how about this?
Story #2: In my network, I have a friend who runs a merchant card service. For a 4.5% fee, he can liquidate any credit card amount and wire you back the funds. So, what’s the strategy?
- Get yourself a new credit card that offers 0% interest for 12-18 months. Let’s say I have a limit on that card of $15,000.
- I cash it out and receive 95.5% of it back ($14,325).
- Then, I can call up my friend, Tyler, who offers 15%-25% APR on 12-month promissory notes (we’ll say 20% for this example). He gets the $14,325.
- Pay the minimum monthly payment on my 0% interest credit card for 12 months. Let’s say $30 a month for 12 months ($360).
- At the end of 12 months, I receive $17,190 on my money. Pay off the credit card balance of $14,640 ($15,000 – $360).
- Pay off the credit card and keep the difference of $2,550 ($17190 – $14,640).
- Total cost out of pocket: $1035. Total return: $2,550.
- ROI: 246%
With all of this in mind…
I only recommend the use of leverage for people who have 1) strong financial discipline and 2) a good amount in savings as a reserve. Know that your sources of funds are secure and only partner with people who have a consistent track record of paying their notes on time. Ask for references. Vet both sides of the arbitrage.And, of course, enjoy the great returns!
If you’re wondering more about private lending, you’re welcome to schedule a time to talk. If you’d like to read more of my cyber-etchings, more posts can be found here.