Real Estate Verses Stock, Part 3: Other Peoples Money (OPM)
OTHER PEOPLE’S MONEY (OPM) is when others pay for your investment in an asset, fully or in part.For the initial investment, the OPM is your employer’s contribution into your 401k plans or your stockbroker when buying stock on margin.Leverage is all about OPM!
There is no OPM for a savings account. Why use your own money when so many people and businesses are willing to let you use theirs?
The enormous leverage in real estate is obtained with OPM.Real estate OPM can come from a variety of sources with the most common being a bank.There are also individual investors or groups of investors looking to fund real estate purchases in order to get a steady stream of income.How to get your real estate investment funded with OPM will be the subject of a future article.
Of course there are ongoing costs for all these investments.For the saving account, the cost to the bank for managing your money along with their profit margin is factored into the interest rate.Similarly, the cost of maintaining your stock investment is subtracted from the returns. If you buy stock on margin, you have to repay the stockbroker with your money or from the profits earned from the investment.All expenses associated with your saving account, 401k and stock are paid in full with your profits:No OPM.
For real estate, you have to pay the bank back for their contribution to your investment: the mortgage.If you flip the real estate investment, you pay the bank in full with your profits along with all other expenses.There is no OPM paying flipping expenses!
If you are buying and holding your real estate investment, it is recommended that you use OPM whenever possible, there are other on-going expenses such as insurance, taxes, maintenance, property management fees, etc.Other people, your tenants, pay these expenses in full or in part.If you invest correctly, your tenants pay 100% of all expenses, including the mortgage, with true passive income left over for you each month.Since the real estate correction started, getting positive cash flow property has never been easier.
Real estate investments maximize OPM and maximize your wealth!
