Have you ever heard the term OPM used?
Some financial “experts” thrown it around a lot.
They make it seem fun and easy to use.
But it’s not as easy as it sounds and it comes with potential for negative consequences.
Let me explain.
What Is OPM?
OPM stands for Other People’s Money.
It means you use other people’s money to buy assets to make money.
This could be in the form of an equity partner or loan.
Most of the time the person using the term is referring to borrowing money to buy an investment.
Using OPM sounds great and it can be but remember:
How Do You Use OPM to Make Money?
An example of using OPM would be buying a rental property and putting $10,000 down and borrowing $90,000 from a bank.
I discuss fundamental of rental property in another article located here: 7 Rental Property Fundamentals That You Need to Get Rich.
Leverage is what makes OPM so attractive. It allows you to control a $100,000 asset with $10,000.
And it increases your returns.
Making $100 per month in rental income on $100,000 is a 1.2% return but making $100 per month on $10,000 is a 12% return.
A 12% return is much better and makes you richer much faster but there’s a catch.
OPM increases your risk so there are certain times you should use it.
When Should You Use OPM?
I use a hard rule when deciding to borrow money to purchase investments.
If the investment’s cash flow can’t support itself, don’t borrow money to buy it.
For example, you know that beach front plot of land you want? Don’t borrow money to buy it.
It doesn’t have a house on it and you can’t rent it out.
So there’s no way it will pay for the loan you put on it.
You looking at a house to rent out? That’s when you borrow money to buy it.
Then the next question is how much should I borrow?
How Much OPM Is Enough?
This is more of a personal preference but remember that more debt you have, the more risk you are taking.
I like to stay at putting 20% down.
This means putting down $20,000 on a $100,000 house.
You’ll also want to keep some cash on hand for emergencies.
I know OPM gets thrown around a lot.
And it sounds really attractive because the people throwing the term around make it seem that way.
But it’s more complicated than they make it seem.
So learn how and when to use it and you will be much better off.
Have you used OPM? If so, how did you use it?
Let me know in the comments below.
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