What does it mean when someone says.....

Question

I was shooting the shit with someone the other day who told me you never want to buy anything with your own money.

What does this mean? Has anyone heard this expression before referencing real estate investing?

Thank you

Brandt Smith · Answer

@Rich Hupper it basically means you want to go into a property with as little of your own money as possible. You significantly increase the return on your money with leverage. In other words, if you have $50k to invest, you can invest in one $50k property in cash, or ten $50k properties with $5k out of pocket. The ten properties will give you a much larger return on your $$$ invested.

As for risk, you are trading risk on your invested money for risk of default. Too much leverage sets you up to fail if the market crashes.

JD Martin · Answer

But you still have your money. Look, I'm not saying I agree or disagree with the premise, I was just answering the OP's question.

JD Martin · Answer

It also means that, in theory, you shift the risk of loss to someone else.

Rosston Smith · Answer

It means make banks, and investors buy your properties. Don't use your own cash.

Brent Coombs · Answer

Oh, and to complete the loop - your Lenders are being paid back with OPM too - your Tenant's!

Income-generating assets: ideally bought with 100% OPM, and end up: 100% yours! Whoopee!...

Brent Coombs · Answer

Just to be clear, when you wrote "granted this is not your money per se however it is your equity" - the point to remember is: equity IS a good foundation for obtaining other people's money!

You can't spend equity - but you CAN spend your Lender's HELOC! Cheers...

Rich Hupper · Answer

Thanks everyone seems like this question has been answered

Rich Hupper · Answer

@Brent Coombs hahaha. I think I am starting to see what this individual meant. However when he was telling me this the first thing I thought of was, how many people use helocs to buy flip properties. granted this is not your money per say however it is your equity, which initially made me discredit what he meant when he said that to me.

I can definitely understand how important leverage is when you are holding multi cash flowing properties, rather than dumping all your cash in just one property. Or using banks money for a new construction project. However if you are using someone else money, your credit will be at risk if you screw up, but at least you will still have whatever your cash.

Thanks for the replies everyone

Brent Coombs · Answer

"If you owe the bank $100, that's your problem. If you owe the bank $100 million dollars, that's the bank's problem" - J. Paul Getty.

"Other People's Money" - starring Danny Devito. https://www.youtube.com/watch?v=lUJTRqV7B8E

Mike Hanneman · Answer

@Jd Martin please explain how it shifts the "risk of loss to someone elese?"

If you mess up then they get the property and all the work you have done, (or not done) and your name, credit, etc... gets drug through the ringer.

What does it mean when someone says.....

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