You Have to Have Money to Make Money
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Editor’s Note: This article first appeared in the November 1972 issue of the R.E. News Observer.
The title of this article is sheer nonsense. It’s a cliché usually uttered by those unwilling to try. “You gotta have money to make money” is an easy “cop-out” for those who lack a positive mental attitude and have no understandable plan for accomplishment.
It is true that persons with money certainly have a most proper resource (and money is a resource to the estate-building real estate practitioner). It’s great if you have this particular resource. But, the fact remains that most people don’t have enough money to take advantage of “opportunity” when “opportunity” is available.
Many chances at profit and long-term financial gain are lost because individuals have not properly planned and accumulated money — “the basic resource.”
As long as money is a resource and tool to use when working with “opportunity,” why should the real estate-building broker use his own money? By research, we can review where many (in fact, most) great fortunes have been made by using other people’s money.
When using other people’s money, your “own” money can be set aside in conservative savings accounts and to back your “play and contingent liability.” A classic example can be examined through review of growth area real estate, which hopefully will appreciate 25 per cent in, let’s say, two years.
Choice 1: Take $100,000 of your own assets and buy a piece of land. Sell it in two years for $125,000 and you have realized a 25 per cent profit on your initial investment. This example does not demonstrate the holding cost of property taxes, brokerage selling costs and other fees.
Choice 2: Instead of taking our $100,000 and buying a property outright as in Choice 1, let’s find a $400,000 parcel in the same “path of progress” area used hypothetically in Choice 1. Let’s use our $100,000 as down payment and borrow the remaining $300,000 from conventional sources or have the seller carry back the loan.
In other words, we use OTHER PEOPLE’S MONEY for 75 per cent of our investment. This can be called “Classic Leverage” in real estate.
In two years, we sell this property for $500,000 (the same 25 per cent increase in value as in Choice 1), but by the time you pay off the borrowed capital, you have a neat profit of $200,000 in the same investment period. That’s a 100 per cent profit on the original concept as outlined in Choice 1.
True, the examples are oversimplified, but they clearly demonstrate that broker estate building can be accomplished faster by using other people’s money (borrowed capital).
Using other people’s money does carry with it a factor we have yet to discuss…RISK.
If the “path of progress” area in which we are investing does not appreciate as fast as research indicates it should, we could become “locked into” the investment for a longer holding period than originally anticipated. And during this investment and holding period, we would have to support the leveraged capital in the transaction, i.e. “payments on the loan.”
Other than waiting longer for the land to appreciate, we have the alternatives of selling at a loss, taking our lumps, and reinvesting the residual capital in other ventures. We would thus attempt to recapture our loss in another investment. Real estate is an investment and (like all investments) carries with it a risk factor.
If you don’t like the risk, follow the philosophy of Wil Rogers: “Buy stock. Hold it until it increases in value and then sell it. If it doesn’t appreciate, don’t buy it.”
Clifford P. Weaver, San Jose, California, was a capable real estate administrator who managed the interests of more than thirty partnerships, corporations and joint-ventures. In 1968, he was named “Counselor of the Year” by the Society of Exchange Counselors, and was presented “Best Exchange Award” by the California Real Estate Association. Cliff taught “Broker Estate Building Techniques” for the Richard R. Reno Educational Foundation. Mr. Weaver was Secretary-Treasurer of the Society of Exchange Counselors. He was a Certified Commercial Investment Member and member of The Task Force, composed of leading “problem-solving” real estate practitioners who counsel corporations with real estate holdings.
