Why would a billionaire get a mortgage loan of 150 million USD when he can buy the property outright? It comes down to money management. Put it like this why would I pay 150 million USD for a big house when I can buy a thousand condos for that wholesale price? Then I charge 1,500 USD per month which would give me a CASHFLOW of 1,500,000 USD per month. For a 30 year mortgage if I divide 150 million by 30 I get five million per year for my mortgage payment and divide that by 12 I’m paying about 417 thousand in monthly mortgage with taxes. interest, and expenses I pay at most 500K a month which still gives me a million dollars in profit and I didn’t USE MY OWN money to buy the condos. But remember I wouldn’t charge rent too high or else I’m fucked.
It comes down to this. You use the debt to buy the house then use the rest of your money to build wealth while keeping the cost of the house low. It’s way cheaper to take a mortgage out than to rent or use your own money. Put it like this why would I use my hardworking money to buy a house when I can get a mortgage to buy it and pay a low monthly fee all the while using the current money I didn’t waste on buying the house to build more wealth which will give me better leverage to buy other properties?
The problem is that people think debt is bad. And most debt is bad. But why is it bad? It comes down to what the debt is used for. If you use it for consumer expenses then yeah it’s bad. For consumer expenses, it’s better to use your own money. But wealth creation requires huge risks.
Put it in another perspective. Why use your own money to build a business when you can borrow it, then use your money to pay it off and have the TRUST established to get a bigger loan.
It’s all about cash flow. Loans are a form of cash flow.
The downside however is that you should not take a loan you can’t handle. For example, you make 100K per year. Don’t get a house for that’s 500k with a 15-year mortgage. Don’t leverage debt if you’re impulsive. Only do it if you know where to stop taking money. We all have a limit. If you have a lender to who you owe 200K to then it’s probably better to have 10 lenders who get you 20k apiece. Banks don’t care how they get their money back just as long as they do. Bill Gates ain’t gonna take a 100 billion loan, but he’ll take a one billion dollar loan.
Donald Trump for example in the 1990s thought he could borrow his way into success. And he did for a while. But some big loans require scrutiny, and when creditors saw how much money he owed, to whom he owed it, and the unfeasibility of his projects his empire fell. No one man is too big for scrutiny. Robert Kiyosaki on the other is a guy who knows where his limits are, and that’s he’s still at the top of his game.
Understand your limits. But most importantly build TRUST.
Banks care more about businesses’ ability to pay back loans than they do about the money they are actually making. On the flip side if you are taking a personal loan then they care more about you having a steady income.
Purpose of this article? The leverage game is a good way for those who aren’t very technically savvy to make a run in this world.