Recently, I was at a wealth building mastermind group in Dallas that was attended primarily by physicians and private practitioners who were high income earners. I was having lunch with an impressive young man who was just finishing up dental school, and the topic we were discussing was the high cost of college tuition, when he disclosed to us that he was looking at about $250,000 of student loan debt (approx. $1,200 monthly payment over 20 years).
Using Real Estate Investments to Cover Expenses
It was then that I told him about my son — who didn’t quite have that much debt — and how he was using an investment to pay off his student loan with a fraction of the money. I told him how my son had purchased a note for a fraction of what he owed in student loan debt, and the note’s payments would pay for the monthly payment of his student loan. Later on, he did the same thing to pay for his car payments. In essence, my son’s investment was paying for his car.
It doesn’t necessarily have to be a note investment, as it doesn’t really matter what the vehicle is. It’s the strategy that is crucial. All I’m suggesting is that it’s a good idea to have our investments pay for our expenses, instead of us paying for them out of pocket.
Using an example of a note investment, though, I showed the young man that if he purchased a note for approximately $28,500 that has 240 payments remaining of $300/month and the payments were made through the full 20 years, he’d be looking at approximately $72k.
Now, let’s say he bought three more notes just like that one. He would be out of pocket only $114k (total for all four notes), but over those 20 years, the notes would pay off his $288k in student loan debt.
Applying the Strategy to Real Life
The same concept can be applied to many areas of one’s life. For example, years ago when I was a painting contractor, I worked for a high-end builder who would borrow money out of his life insurance policy, use it to build a house, and then sell the new construction home for a sizable profit. He would use a portion of that profit to pay back the life policy. Then, he would just rinse and repeat the process all over again.
If you really think about it, the profits from the sale of the real estate more than paid the builder’s insurance premiums. In this case, the builder was getting free insurance and then some.
Similarly, this strategy can be demonstrated from a business perspective. For example, I’m using money borrowed from a key man life insurance policy to start an auxiliary business that will benefit my primary business.
Another way I apply this principle in my own life is that I utilize the positive rental cash flow from my local bread-and-butter rental properties to pay for my vacation home.
Other than the increase in equity build up either from some possible appreciation or paying down the mortgage balance, my vacation home is a cash flow loser. But I use the cash flow from my other rentals to pay for my vacation home. Just imagine how many folks we all know who pay for their vacation homes out of their own pocket.
If you think about it, we all have necessary expenses, but it’s how we pay for them that can make all the difference in the world. This concept is just another way people build wealth through the use of intelligent leverage, and it can work even if you’re not a high income earner.
I strongly believe that one needs to leverage carefully, though. It’s probably best to do what you know, what you’re good at, or what you’re passionate about.
If you can invest in multiple asset classes, and utilize collateral or insurance on your investments, it won’t be long before you’ll be living for FREE by having reduced the percentage of your income that you need to live on.
So, what are some of your favorite strategies for utilizing leverage to pay for your expenses?
Let me know with a comment!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.