Leveraging Your Business with Other People’s Money

January 10, 2017 by: 2

The difference between return on invested capital and return on assets is what is commonly called “OPM,” or other people’s money. Maximizing your return on other people’s money lets you keep more of your own money in your pocket while building wealth fast. Here are seven ways to go about doing just that:

  1. Residential Real Estate Investing

Residential real estate is traditionally one of the easiest asset classes to lever up and earn a significant profit on. Many investing experts call it their favorite investment class for exactly this reason.

Residential real estate offers the opportunity to use other people’s money in several ways. First, residential real estate investments historically qualify for long-term, low-cost financing from banks. Almost no other asset class qualifies for 30-year financing terms as easily as residential real estate. In addition, residential real estate also gives investors a ready-made tax break. The mortgage interest deduction is one of the biggest and most lucrative tax deductions in the U.S., and it lets real estate investors deduct all of the money they pay in interest on their home loan.

Residential real estate returns have historically fallen between the higher returns on stocks and the lower bonds, but, “low correlations with stocks and bonds make real estate a diversification opportunity,” according to economists Roger Ibbotson and Laurence Siegel. For this reason, experts have been citing real estate investment as the tool that the wealthy have used to get rich for many years.

To get started in real estate investing, do a simple property search in your area with a real estate agent and ask about properties that would make good investment choices.

 2.Commercial Real Estate Investing

For those who want to go bigger than residential real estate, commercial real estate investment is also a great way to leverage other people’s money. In fact, billionaire Donald Trump’s fortune was built on commercial real estate following his father Fred Trump’s success in residential real estate. Today, thanks to a new breed of investing websites, commercial real estate investing is available to more people than ever.

Commercial real estate might seem risky, but in reality, it can offer attractive returns and can be a great place to invest. Many investors might be concerned about the cyclicality in the business, but it’s not too late to get in.

Commercial real estate might seem risky, but in reality, it can offer attractive returns and can be a great place to invest. Many investors might be concerned about the cyclicality in the business, but it’s not too late to get in.

“The real estate cycle isn’t over,” said Scott Crowe, global portfolio manager of the Resource Real Estate Diversified Income Fund. U.S. accounting and consulting firm Deloitte is telling clients that the market and investment opportunities are on firmer footing now than they have been in some time. Like residential real estate, commercial real estate generally qualifies for attractive long-term bank financing and can offer substantial tax benefits.

3. Business Loans

If you are willing to do a little more hands-on work, a great way to leverage other people’s money is through small business loans. The Small Business Administration offers loans to people starting small businesses, but the agency does not make the loans directly. The loans are made through existing banks and carry medium-term financing and attractive interest rates — in some cases, up to 10 years with loans that have interest rates as little as 1 percent above mortgage rates. The SBA loans can require as little as 10 percent down, and loans can be up to $5 million in some cases.

The great thing about SBA loans is that you don’t need to be particularly well connected or have any special background to be a success. There are plenty of ordinary people with big success stories as a result of SBA loans.

4. Silent Partners

Another way to leverage other people’s money is to build wealth by starting a business with a silent partner. Frequently, people with great business ideas are not the same people with money to invest. To solve this problem, many businesses are started as partnerships, with one partner providing funding but staying out of the day-to-day business activities and the other partner acting as the manager and hands-on operator.

Silent partners are distinct from investors in that even if they are not directly involved in the business on a daily basis, they are still consulted for major business decisions and should be there to give advice and background expertise. Silent partners can be used in all sorts of businesses, from flipping houses to manufacturing or retailing.

Silent partnerships can benefit both partners and enable the formation of a company that would never have been started otherwise. To begin finding a silent partner, tell friends and family about your business idea and ask if they know anyone who could act as a mentor and silent partner to help launch it.

5. Angel Investors and Venture Capitalists

Angel investors and venture capitalists are related to silent partners but are distinct. A partner, whether silent or not, is generally consulted on business decisions and has at least some small role in the running of a company. In contrast, venture capitalists and angels are investors who provide a limited amount of advice and mostly financing. They expect to be paid a return on their investment in the company, and unlike a silent partner, they are almost never involved at the time the company is formed.

Yet both angel investors and venture capitalists can offer substantial opportunities to people starting a business with high growth potential. From Tesla to Apple to Facebook, many of today’s biggest and most successful companies were built using venture capital financing, with the company founders investing very little of their own money. Angel investors generally get involved a little earlier than venture capital investors and often take bigger risks than venture capitalists in the hopes of getting a bigger return.

Investing experts tout the benefits of using venture capital, including guidance and support for the company. Venture capitalists “can open doors, create synergies across companies and provide entrepreneurs with access to top talent,” according to Mike Woollatt, CEO of the Canadian Venture Capital & Private Equity Association.

6. Stock Market Margin and Options

If you want to build wealth using other people’s money and still keep your day jobs, investing in the stock market using leverage can be a good idea. The Standard & Poor’s 500 index returned an average of 11.53 percent annually between 1928 and 2014 according to the Stern School of Business at New York University. That return is pretty good, but it could be even better for investors successfully leveraging other people’s money. That tactic underlies much of the hedge fund world today and has created numerous billionaires, from John Paulson to Ray Dalio.

For the average individual, starting a hedge fund is not feasible, but using options and margin are. Options allow you to leverage money from other investors in the market without having to pay interest while you are raising the funds. Options can be risky if used incorrectly, but they can also be highly lucrative. Economists Amit Goyal and Alessio Saretto found that some options strategies could yield returns of 30 percent annually or higher, representing an excellent return, given the risk involved.

In contrast to options, buying stocks on margin allows investors to essentially borrow for their investments for a monthly interest charge. That charge varies depending on interest rate levels, but it is generally below the expected annual returns on stocks. For that reason, many investment firms tout responsible use of margin as having benefits for investors.

7. Government Small Business Innovation Grants

Finally, for creative people with great ideas, perhaps no other opportunity to use other people’s money and build wealth is as significant as the U.S. government’s Small Business Innovation Research program.

The SBIR program offers grants to individuals and small businesses with a unique idea to solve a challenge faced by a department of the government. The individual can apply for a grant based on his idea, and if the government likes the idea, it will award grants up to several hundred thousand dollars to start a business that will solve the problem. The SBIR program has been responsible for numerous successful businesses and has helped thousands of people build substantial wealth, all without spending a penny on their own.

Have you ever thought about “using Other People’s Money: OPM” so that you could buy a business and re-invent a business/or real estate and also realized that customers and renters pay for it all for you if structured so.

Buy a business using none or very little of your own money. This article may amaze you as you see the power and possible simplicity of leveraging your business ownership — for instance by finding a motivated seller who will take little or nothing down and do owner financing (and carry a lien) upon the business and properties, for one example. The following are suggestions based on some U.S.A. processes, and is an outline of how it could work, and some considerations for such an opportunity to succeed would include your finding out what are the exact applicable laws and regulations that you must comply with in your area in the jurisdictions of your state and local courts and laws — which are probably quite different from place to place.

Here are some fascinating steps to get ownership of a business using little or none of your own money:

  1. Read books and articles about using other people’s money to leverage a business, e-Commerce, iMarketing/publishing, or real estate, for example: Barry Lenson Executive Editor at Trump University wrote: from “use other people’s money” page at TrumpUniversity.com “…in the world of real estate investing, where it is possible to apply leverage in all kinds of different situations, it can be a very smart thing to do.” You stand on the shoulders of the previous generation in some businesses, or families.
  • Trump U. tells a story about “Ben” who went to a friend and said something like, “If you lend me $40,000 to make a down payment on a house and renovate it, I will handle all the details for you (and discussed how they would share the cost and profit).”
    • Well, it indicates that he found a property, negotiated and made the purchase, supervised the renovation and sold it so that they split a profit after costs were paid, making about $35,000 each on their first joint venture. They did another deal, then, Ben went out on his own. It does not mention how long that took.
  1. According to Merriam Webster Online Dictionary, Leverage is the use of credit to enhance one’s speculative capacity. It can also be defined as: The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment as well as the amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.
  2. But the Business or real property in your name or corporate name, you need to make sure that:
  • You are getting a good deal (paying less than market value, as it stands) in a stable or improving/or transitional location (edgy, but luck may go either way(?); it probably does not depend just on you or depends on moving faster than others, etc. – caution/caveat).
  1. Make your profit at time of your purchase (meaning loaded with potential, or not) by how you buy, with what plans and your creativeness. So that, there is potential to increase the value quite significantly by fixing up, with repairs or more extensively remodeling, re-inventing the product, or the market — dressing up with some inexpensive improvements, or that more expensive ones can/will increase value quite well.
  2. Visualize that your customers and/or your renters pay for the deal for you — you, therefore, would need little money to own your business or property. Consider holding your purchase so that the business income or rents pay it off for you over the course of time.
  3. Make a strong profit possible, and do it to succeed. Do you see that when you own a business or rental property that you must make a “positive cash flow” (call it a profit) to have the business pay for itself, or fail, fall prey to lack of equity and appreciation, or not following through by you or ones depended upon.
  • If you do not make a positive cash flow, significant profit, you might still stay in business if the reason that there is “not a good profit” is called a “loss on paper,” that is, after all expenses of the business are paid and depreciation is figured on the equipment, improvements and fixtures you are still able to exist, well or not so well, that is, “loving”, eating beans and rice, living in a back-room or attic.
  1. Be realistic, but not paralyzed by negativity or over-concern. Realize that without a good profit: then there is a cruel-risk for you, the seller and/or the lender (that’s why conventional financing for an inexperienced owner is difficult or even impossible). So then a motivated seller becomes highly desirable to put you in the best position to profit enough.
  • You most likely would not have enough operating capital to reinvest in new equipment, improvements and to grow the company — unless the customers pay a hefty amount in advance, down payment or such.
  • In rentals (leases) you receive security deposits and some rent paid in advance by new renters, but you often have to pay back all of that including the security deposits if renters have maintained the property except for ordinary wear and tear, and they leave it clean.
  1. Compare this leveraging idea to issuing stock in a market economy based on stock markets where the stock investors “pay for the business” for the corporation and common stock investors have no ownership in the company, as such, but must sell the stock to other investors.
  • In this case the seller or lender is paid off by funds received from common people as your customers and/or renters “similar to common-stock investors” having no ownership rights as money is paid to you and you pay the seller.
  1. Realize that you could lose it all — like any investors when you invest time and money in a business or real estate; you may lose on the business or the real estate investment — and sellers may repossess the business, or investors foreclose on your property, if you cannot pay your commitment and do not have adequate operating funds.

  1. Issue stock, perhaps, when your idea is developed, as your business succeeds, then, you, the lender and seller may profit and pay off loans by issuing, selling stock, that is: “selling paper”. So your customers and renters being dependable and prompt to pay you is so very important, just like stock investors buying issues of stocks at a good price for that stock market is necessary to that issuing corporation.
  2. Realize that if your leveraged business is being a “landlord”, you may develop this into either:

A real estate type of “business,” with multiple properties, and managing your rentals; or,

Remain as an “amateur, individual” with a small investment in real estate, and then it may not really be a business as such but more like a “hobby,” a sideline.

  1. Finance through the seller, owner financing, is a probable way of leveraging which would mean that the owner sells a business or property to you and finances it for you with a down payment and a monthly payment — examples:
  • Owner is retiring and moving to the retirement home or a farm and wants a monthly income, and little or no responsibility for managing and up-keep (for the seller).
  • Owner is moving to another country, state, or province

  1. Find conventional or investor financing to borrow your money from a financial institution, if you can pay a large down payment.

Perhaps you get a mortgage company to finance and set the terms that you must accept on the real estate.

Long term financing is not commonly done by banks. Banks are usually not mortgage companies.

You may be able to find a partner to invest with you, if you can find someone who would own part of the company for example. Partners as investors are often leery of financing such deals for new inexperienced owners.

  1. Check consumer laws, if you are buying “personal property” which will become business materials as an individual, as a proprietor — not as a corporation — you may have consumer rights that protect you in some states or countries for 72 hours of some such period of time, as consumer protection, to vary items quickly (without procrastinating).
  • This may depend on how the paper work or contract is written, if it is sold all together as a business (as a “bundle”) or in pieces as individual items.
  1. Get precise list of any/all materials, stock merchandise, furniture and/or equipment that go to you as part of the business — or else, you may have problems knowing what you are buying or have bought
  2. Know that fixtures attached to the property are part of the real estate in many countries, but unattached equipment can be removed, and you could be surprised by what you thought was part of the deal as opposed to what is and is not given over to you by the previous owner/lien holder.

  1. Be sure to get the seller to furnish you a “warranty deed”, or whatever that deed is called in your Borrow to start a business
    More Canadians have joined the ranks of the truly rich by starting their own businesses than by any other means — and almost all of them had to borrow big to do it. But it’s not for the faint of heart. When Toronto bread and gourmet sandwich maker Simon Bradley needed cash to set up a shop in Toronto, he struck a deal with his banker that gave him access to close to $500,000 in funds. But he had to pledge his house as collateral. Seven years and one child later, Bradley (we changed his name to protect his privacy) now owns four successful bakeries, including a flagship store in Toronto’s financial district. He gambled that using leverage to secure high-traffic storefront locations in key areas of the city would pay off, and it did. His profits are soaring and his business is still growing.

The best part is, the richer you get, the easier, it is to borrow more. If you borrow enough, eventually the people who lend you money are taking on more risk than you are. “Rich investors, like the Reitmans or the Trumps, borrow aggressively, roll the dice and hope to win big,” says Talbot Stevens. “And, if they don’t? They flush the loss and start over again — with someone else’s money.”

If you’re interested in borrowing to start a business, you should start off using leverage in conservative and responsible ways. If you’re like most entrepreneurs, you’ll start with what’s called “love money” — low-interest loans from family and friends, explains Rick Spence, a consultant and founder of the Canadian Entrepreneur blog. Once you’ve burned through that, you’ll likely turn to angel investors — wealthy individuals who enjoy the risks and rewards of a start-up. “You can borrow anywhere from $10,000 to $100,000 with angel investors,” says Spence, but these investors expect a return on their investment, and it often comes in the form of part ownership or a stake in your earnings.

If you need to borrow from banks or other financial institutions, it will come at a steep price. Even in today’s low-interest environment you can expect to pay 12% on a business loan. Instead, consider borrowing against the equity in your home, says Spence. That’s what Mark Pervan did when he launched his renovation business in the midst of the recession. He used a secured line of credit to smooth out cash flows and keep everything on schedule. Two years later, he’s debt-free and so busy he has to turn down work. “Many advised against using this type of leverage because if your business fails then you could lose your house,” says Spence. Still, for many entrepreneurs, it’s the cheapest way to borrow.

  • The warranty deed in general means that the seller warranties (guarantees) having the right to transfer title of the ownership of real estate. Merriam Webster Online Dictionary warranty deed
  • Seller sometimes will pay for the warranty deed, legal work and also owner finance it for you, if they are motivated and you seem like a good risk and impress them as being a good worker, and a good manager.
  1. Register the deed immediately and get legal work verified as part of the deal using your attorney or a title company, if real estate is involved.
  • There are title companies in the USA that specialize in getting deed and title papers correctly made out and ready for closing, ready to sign for the parties for the title to real property to be passed to the new owner (yourself).
  1. Take possession of the property as you must not allow renters to continue living there without paying you, nor paying to the old owner, nor allow another operator to retain the business or property, nor even have the seller to remain in possession of the business or property.
  • The seller might become a temporary employee of “your company” (consultant) and train you, if that is part of the deal. That is risky, of course. You may get bossed around, and it could turn out to be like a scam if the seller “hangs in there.”
  1. Check the laws in your particular country or state to find out about real estate title insurance through your title company. Title companies make sure that the real estate is under (or is brought into condition of) “clear title,” so that all liens are paid off at the closing including paying back taxes.
  • Require title insurance policy to be part of the closing (passing title) to cover the risk that the real estate property title might be bad, that is if:
  • Seller did not have title or clear title due to unsatisfied (un-cleared) liens of lenders or taxing authorities, etc.; or
  • A mistake or even a fraud (misrepresentation) was involved for example.
  1. Urgently get any real property warranty deed recorded and registered in your name and put on the county tax rolls to be sure you are correctly shown as the legal owner. Register the business in your name as an individual at the county courthouse, or license and register a corporate name at the state level; check the laws of your locale.
  • You may have to hold various licenses, pay fees and taxes as the owner of some kinds of business, to legally operate or collect taxes, etc. Of course some businesses, such as restaurants, have additional matters to comply with because of state and local health department laws and regulations.
  1. Have your lawyer check contracts, financing (liens) and any real estate deed(s) for standard and desired covenants (the correct legal agreements) and avoid some unusual deal: One is, the right to pay-off early with or without penalty, or the owner-financier may have put in no early pay-off to assure retirement income flow to the seller, tying your hands!
  • Caution: restrictions placed on real estate by covenants in the deed can restrict how and the purpose for which the land and improvements may be used, regardless of zoning. Contract can throw out uses that are legal but disallowed in the contract!
  1. Get any business licenses required for a business, and check with the state to get set up to collect and pay sales taxes if retail is involved, and find out about business taxes which may be more demanding (like estimating income and paying quarterly taxes, etc.).
  • Publishing and general commercial printing companies are one kind of business and religions, too, that are not licensed under USA and U.S. state laws because of the U.S. Bill of Rights which says congress shall make no law restricting the freedom of the press, or religion. This is an important issue to consider. Some persons create either or both combined to do whatever without a license, yet courts and laws do assign certain responsibilities and protections of the public as well, that is, against fraud or other crimes.
  1. Beware of possible squatters who may “own property” by having been allowed to hold adverse possession by previous owners, for the statute of limitations. Sounds wrong, but possession is a large part of ownership over time after the intruder or defaulting party is known but allowed to stay; laws vary from state to state.

To conclude this article, I want you to pay attention to two (2) other examples below as captured by moneysense, of how you can use other people’s money to buy real estate or start a business:

Borrow to buy real estate
It was the mid-1980s and D.G. Southen was only 24 years old when he bought his first investment — a house near the University of Western Ontario in London, Ont. He borrowed $20,000 from his parents to put a down payment on an $80,000 house. To pay the mortgage and other costs Southen rented the place out to six other roommates. “I slept in an unheated attic and paid the mortgage from the rent I collected.” After a few years Southen grew tired of living with so many people, so he sold the house for $108,000, paid his expenses and used the net profit for a series of down payments on four condo units near the university. Southen was fortunate: he caught an “updraft” in the housing market and made a lot of money.

Over the years, Southen has continued to borrow to invest in rental properties. These days he no longer looks at buildings with less than 40 units. “I’m older and I need to allocate my time more wisely, but I had to start somewhere.” The part he likes best is that once a property’s mortgage is paid off, it will keep spinning off cash every month from the rent. “Most people will draw from a retirement fund when they stop working and most will deplete that asset as they earn their income,” he says. “Not me. I’ll earn an inflation-adjusted $50,000 from just one of my holdings, and I won’t ever touch the capital.”

Large apartment buildings may be out of the equation, but the good news is that real estate is probably one of the more accessible ways to invest borrowed money, says Talbot Stevens, financial educator and author of Dispelling the Myths of Borrowing to Invest. “It’s a mini-business that doesn’t have a lot of complexity to it. For the average person real estate can be a good strategy.”

To make sure you don’t get burned, the key is to remember that borrowing to buy an asset, called leveraging, magnifies both the gains and the losses. To understand how this works consider what happens if you put 10% down on a property worth $300,000. Your original investment is $30,000. If the house goes up in value by $60,000 and you sell, you’ll make a $30,000 profit (before interest, taxes and expenses). So the house only went up in value by 20%, but the return on your investment was 100%. That’s how leverage juices your returns.

Now consider the downside: What if the house drops in value by $60,000 and you sell? If that happens, you won’t get any of your $30,000 down-payment back, and worse, you’ll also owe $30,000 to the bank to pay off what you’re short on the mortgage. In this case, the investment has declined in value by just 20%, but you’re underwater by 100%. You’ve lost more than you invested to begin with.

That’s why the key to building a successful real estate portfolio using leverage is to invest in property that is cash-flow positive. That means the income you get from renting out the property covers all your expenses, including the mortgage, taxes, insurance, maintenance, repairs and a contingency fund. That way your property will be making money for you whether house prices go up or down — so hopefully, you’ll never be forced to sell in a down market.

Borrow to start a business
More Canadians have joined the ranks of the truly rich by starting their own businesses than by any other means — and almost all of them had to borrow big to do it. But it’s not for the faint of heart. When Toronto bread and gourmet sandwich maker Simon Bradley needed cash to set up a shop in Toronto, he struck a deal with his banker that gave him access to close to $500,000 in funds. But he had to pledge his house as collateral. Seven years and one child later, Bradley (we changed his name to protect his privacy) now owns four successful bakeries, including a flagship store in Toronto’s financial district. He gambled that using leverage to secure high-traffic storefront locations in key areas of the city would pay off, and it did. His profits are soaring and his business is still growing.

I am quite sure you have learnt a few things on this topic, ‘Leveraging your business with other people’s money’ and if this was helpful, please share among your social networks and link back to the page for more exciting resources on personal finance

 
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    2 Comments on "Leveraging Your Business with Other People’s Money"

  1. Timmy Grace says:

    How can I borrow to start my own. Business

     

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